Final answer:
Identified hazards should be classified as low, moderate, or high, and this risk classification can be represented by a matrix. This approach is essential in various fields, including the insurance industry, where it's used to predict risk levels for individuals, such as high-risk drivers, and to address the challenges of moral hazard and adverse selection.
Step-by-step explanation:
Identified hazards should be judged as low, moderate, high in terms of frequency and severity. This risk assessment approach is commonly represented by a matrix that helps in categorizing and prioritizing potential risks based on their impact and the likelihood of occurrence. The process of risk assessment is a critical component in fields such as health and safety management, insurance, and various types of project management, where it aids decision-makers in developing strategies to mitigate, transfer, or accept risks.
For example, in the insurance industry, classifying people into risk groups is a complex issue that involves analyzing past behaviors and occurrences to predict future risks. An individual who had a major automobile accident may be considered a high-risk driver by an insurance company, and hence might be charged higher insurance premiums. This classification process can lead to debates over moral hazard and adverse selection, two major problems that arise from imperfect information in insurance markets when attempting to categorize those purchasing insurance into various risk levels.