Advanced Diploma of Financial Planning (ADFP) Practice Test

What is the primary definition of a peril in insurance terms?

1. The probability that a loss will occur

2. A moral hazard

3. A condition that increases the chance of a loss

4. The cause of a loss

The correct answer is: The cause of a loss

In insurance terms, peril refers to the specific risk or cause of a loss that is covered by an insurance policy. This includes events such as fire, theft, flood, or other incidents that lead to property damage or loss. When a peril occurs, it triggers the insurance coverage, making it essential for defining the scope of what risks an insurance policy protects against. Understanding that peril is fundamentally about the cause of a loss helps clarify the overall structure of insurance. It’s crucial for policyholders to know which perils are covered to ensure they have the appropriate protection against financial risk. The other options do not accurately capture the definition of peril. Probability relates to the likelihood of a loss occurring, which is more about risk assessment rather than the cause. A moral hazard refers to human factors and attitudes that affect risk management, not the innate risks themselves. Conditions that increase the chance of a loss deal more with risk factors rather than identifying the specific events that cause loss.