Which of the following best defines "moral hazard"?

Which of the following best defines "moral hazard"?

• A. Physical conditions that increase risk
• B. Fraudulent claims made by insured individuals
• C. Behavioral changes in individuals due to being insured
• D. Environmental risks affecting property value

Answer: (C)

"Moral hazard" refers to the change in behavior that occurs when individuals take on riskier actions because they are insured. When people know that they have coverage for potential losses, they may engage in riskier behavior than they would if they were not insured, because the financial repercussions of their actions are mitigated by the insurance policy. This concept highlights the importance of understanding human behavior in the context of risk management and insurance. While other options address different dimensions of risk—such as physical conditions, fraud, and environmental risks—they do not capture the essence of moral hazard. The key aspect involves the behavioral changes that can lead to increased risks and potential losses, emphasizing the psychological components of risk-taking in an insurance context.

"Moral hazard" refers to the change in behavior that occurs when individuals take on riskier actions because they are insured. When people know that they have coverage for potential losses, they may engage in riskier behavior than they would if they were not insured, because the financial repercussions of their actions are mitigated by the insurance policy. This concept highlights the importance of understanding human behavior in the context of risk management and insurance.

While other options address different dimensions of risk—such as physical conditions, fraud, and environmental risks—they do not capture the essence of moral hazard. The key aspect involves the behavioral changes that can lead to increased risks and potential losses, emphasizing the psychological components of risk-taking in an insurance context.