Moral Hazard
What Does Moral Hazard Mean?
Moral hazard refers to the increased likelihood that a person insuring an asset will either take greater risks with it or provide it with less care.
Insuranceopedia Explains Moral Hazard
Imagine a person without insurance coverage taking their car on the road. They are likely to drive very carefully and defensively, knowing they would bear the full cost of any damage to their vehicle, other property, or liabilities. However, if the same person starts driving more recklessly after acquiring auto insurance, this would be an example of moral hazard.
Moral hazard is a critical factor for underwriters, as it highlights that past uninsured behavior does not always predict future insured behavior. It increases the probability of a claim being filed.
While the terms may seem similar, a moral hazard and a morale hazard are distinct. Moral hazard involves a conscious decision to engage in riskier behavior due to increased coverage, whereas morale hazard reflects an unconscious tendency toward riskier actions.
