What is the relationship between hazards and perils in insurance?

Hazards and perils play distinct yet interconnected roles in the realm of insurance. Hazards can be understood as conditions or situations that increase the likelihood of a peril occurring. In contrast, perils refer to the actual events or incidents that can cause loss or damage, such as fire, theft, or natural disasters.

Choosing the option that states that hazards increase the chance of perils resulting in loss correctly identifies the relationship between these two concepts. For instance, if a property has inadequate electrical wiring (a hazard), it increases the risk of a fire (a peril) occurring. By recognizing the connection that hazards create a more vulnerable environment for perils to manifest, it becomes clear how effective risk management strategies can be formulated to mitigate potential losses.

Understanding this relationship is crucial for both insurers and insured parties, as it highlights the need for risk assessment and prevention measures in order to minimize the potential impact of perils on insured assets.