Insurance responds only to a specific kind of risk.
- A pure risk carries only the possibility of loss or no loss, no upside. Fire destroying a building, a car colliding with another, a homeowner's liability for a guest's injury: all are pure risks and all are potentially insurable.
- A speculative risk carries the possibility of profit or loss: buying shares, betting on a sports game, launching a new product. These are not insurable. Insurance is a mechanism for the transfer and pooling of pure risk.
A hazard is a condition that increases the chance or severity of a loss.
- Physical hazard: a tangible condition: a frayed extension cord, oily rags piled in a basement, an icy walkway.
- Moral hazard: dishonest tendencies that lead the insured to cause or exaggerate a loss for gain (arson-for-profit, inflated theft claims).
- Morale hazard: careless or indifferent attitudes brought on by having insurance ("I'm covered, why bother locking up?").
The exam asks you to distinguish moral (intent to defraud) from morale (carelessness because of coverage). Both push premiums up; only moral is dishonest.
Common mistake: treating "moral" and "morale" as synonyms. They are not, and the distinction is exam-relevant.
🧠 Memory hook, "Moral = malice, Morale = laxity": dishonest intent vs. relaxed attitude.
Recall: Why is a speculative risk uninsurable? Distinguish a physical hazard from a moral hazard with one example of each.