(a) Explain the following terms… | Insurance

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(a) Explain the following terms used in insurance.
(i) peril
(ii) hazard.
(iii) disclosure.

(b) Differentiate . between the following classes of risks: (i) pure and speculative risks; particular and fundamental risks; (iii) static and dynamic risks.

Answer

(a) Explanation of terms used in insurance

(i) Peril: A peril is the actual cause of a loss, that is, the event or contingency that gives rise to damage, injury or destruction. Examples are fire, flood, accident, theft, storm and death. It is the immediate reason why a loss occurs and is what an insurance policy is taken out to protect against.
(ii) Hazard: A hazard is a condition or circumstance that increases the chance (frequency) or severity of a loss arising from a peril. It does not cause the loss directly but makes it more likely or more serious. A physical hazard relates to the physical characteristics of the risk (for example, storing petrol near a fire), while a moral hazard relates to the attitude, honesty or carelessness of the insured (for example, deliberate carelessness or fraud).
(iii) Disclosure: Disclosure is the duty of the proposer, under the principle of utmost good faith (uberrimae fidei), to reveal voluntarily and truthfully all material facts that could influence the insurer's decision to accept the risk or fix the premium. Failure to disclose such facts (non-disclosure or concealment) can make the contract voidable at the option of the insurer.

(b) Differences between the classes of risk

Basis	First type	Second type
(i) Pure vs Speculative	Pure risk gives only two outcomes: loss or no loss. There is no chance of gain (e.g. fire, death, accident). Pure risks are insurable.	Speculative risk gives three outcomes: loss, no loss or gain. It is deliberately undertaken in the hope of profit (e.g. gambling, business trading). Speculative risks are generally not insurable.
(ii) Particular vs Fundamental	Particular risk is personal and localised in its cause and effect, affecting only an individual or a few persons (e.g. a house fire, a motor accident). Particular risks are usually insurable.	Fundamental risk is impersonal in origin and widespread in effect, affecting the whole society or large groups (e.g. war, earthquake, flood, inflation, epidemic). Most fundamental risks are the responsibility of the state and are largely uninsurable.
(iii) Static vs Dynamic	Static risk occurs whether or not there is a change in the economy; it results from natural causes or human dishonesty (e.g. fire, theft, perils of nature). It is regular, predictable and insurable.	Dynamic risk arises from changes in the economy or society, such as changes in price levels, technology, consumer taste, income or government policy. It is less predictable and generally uninsurable.

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Answer Details

(a) Explanation of terms used in insurance

(i) Peril: A peril is the actual cause of a loss, that is, the event or contingency that gives rise to damage, injury or destruction. Examples are fire, flood, accident, theft, storm and death. It is the immediate reason why a loss occurs and is what an insurance policy is taken out to protect against.
(ii) Hazard: A hazard is a condition or circumstance that increases the chance (frequency) or severity of a loss arising from a peril. It does not cause the loss directly but makes it more likely or more serious. A physical hazard relates to the physical characteristics of the risk (for example, storing petrol near a fire), while a moral hazard relates to the attitude, honesty or carelessness of the insured (for example, deliberate carelessness or fraud).
(iii) Disclosure: Disclosure is the duty of the proposer, under the principle of utmost good faith (uberrimae fidei), to reveal voluntarily and truthfully all material facts that could influence the insurer's decision to accept the risk or fix the premium. Failure to disclose such facts (non-disclosure or concealment) can make the contract voidable at the option of the insurer.

(b) Differences between the classes of risk

Basis	First type	Second type
(i) Pure vs Speculative	Pure risk gives only two outcomes: loss or no loss. There is no chance of gain (e.g. fire, death, accident). Pure risks are insurable.	Speculative risk gives three outcomes: loss, no loss or gain. It is deliberately undertaken in the hope of profit (e.g. gambling, business trading). Speculative risks are generally not insurable.
(ii) Particular vs Fundamental	Particular risk is personal and localised in its cause and effect, affecting only an individual or a few persons (e.g. a house fire, a motor accident). Particular risks are usually insurable.	Fundamental risk is impersonal in origin and widespread in effect, affecting the whole society or large groups (e.g. war, earthquake, flood, inflation, epidemic). Most fundamental risks are the responsibility of the state and are largely uninsurable.
(iii) Static vs Dynamic	Static risk occurs whether or not there is a change in the economy; it results from natural causes or human dishonesty (e.g. fire, theft, perils of nature). It is regular, predictable and insurable.	Dynamic risk arises from changes in the economy or society, such as changes in price levels, technology, consumer taste, income or government policy. It is less predictable and generally uninsurable.

Read lesson note on Perils (WAEC)

Read lesson note on Risks (WAEC)

Read lesson note on Hazards (WAEC)

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(a) Explain the following terms used in insurance. (i) peril (ii) hazard. (iii) disclosure. (b) Differentiate . between the following classes of risks: (i) ...

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(a) Explain the following terms used in insurance. (i) peril (ii) hazard. (iii) disclosure. (b) Differentiate . between the following classes of risks: (i) ...

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