The Risks of Hazard

Not only is insurance an industry that is based on a general inability to predict what is going to happen, it is a hyper-competitive industry in which the winners are those who can best predict the unknowable…or at least be less wrong than their competition. Insurance underwriting is the actual process of pricing what is unknowable, and is necessarily performed with rigorous processes underpinned with vast amounts of data. However, underwriting is never perfect, and the gap between actual underwriting and perfection is called underwriting leakage.

Peril, risk, and hazard are three words used frequently in my business. And according to the Oxford English Dictionary, they have very similar definitions:

• Peril: Serious and immediate danger. 

• Risk: Situation involving exposure to danger. 

• Hazard: Danger or risk.  

You could get away with interchanging these words in day-to-day conversation. But in insurance and financial circles, they each have a distinct meaning and it’s important to understand their differences.