Property and Casualty Insurance Practice Exam

Which hazard can increase the possibility of a loss due to carelessness?

1. Moral hazard

2. Physical hazard

3. Morale hazard

4. Theoretical hazard

The correct answer is: Moral hazard

The correct choice relates to moral hazard, which refers to the change in behavior of an insured party when they hold insurance coverage. When individuals or entities are insured, they may feel less inclined to exercise caution or may adopt riskier behaviors because they know they are financially protected against certain losses. This altered behavior due to the safety net of insurance increases the likelihood of a loss occurring due to carelessness. Moral hazards arise from the actions and intentions of individuals, as opposed to the inherent characteristics of the situation or the physical circumstances. It’s fundamentally about the psychological aspect of taking risks knowing that there is a backup plan in place, which leads to a greater chance of loss as an individual may no longer prioritize safety or diligence. Understanding moral hazard is crucial when assessing risk for insurance purposes since it directly impacts how insurers calculate premiums and coverage options.