How is a hazard different from risk?

A hazard and risk are distinct concepts in insurance and risk management. A hazard refers to a condition or situation that increases the likelihood of an undesirable event, such as damage, injury, or loss. It acts as a contributing factor that heightens the probability of a risk occurring. For instance, ice on the road is a physical hazard that increases the risk of car accidents.

On the other hand, risk embodies the uncertainty associated with potential loss or damage resulting from that event occurring. It encompasses the broader implications and vulnerabilities that may arise from various hazards. Therefore, while a hazard indicates a specific cause or contributing factor to a loss, risk represents the overall assessment of potential future losses and their uncertainties.

This differentiation is fundamental in insurance as it helps in evaluating and managing exposures effectively. By understanding how hazards influence risks, insurers can better price policies, manage reserves, and develop strategies to mitigate potential losses.