Property and Casualty Insurance Practice Exam

Which type of risk involves intentional actions to create a loss?

1. Moral hazard

2. Physical hazard

3. Pure risk

4. Speculative risk

The correct answer is: Moral hazard

Moral hazard is the type of risk that involves intentional actions taken by an individual or entity that increase the likelihood of a loss. This occurs when a person’s behavior changes as a result of having insurance coverage or when they have fewer incentives to prevent loss because they expect the insurer to cover their losses. For example, a person might be less cautious about locking their car if they know they have comprehensive insurance that covers theft. This concept contrasts with physical hazards, which pertain to the tangible characteristics of a situation that increase the chance of a loss occurring, such as unsafe conditions or environmental factors. Pure risk involves situations that can only result in a loss or no loss, with no potential for profit, such as natural disasters. Speculative risk encompasses situations where there is a chance of loss, gain, or no change, such as investing in stocks or entrepreneurial ventures. Thus, moral hazard specifically focuses on the intentionality behind the actions that lead to a loss, distinguishing it from other types of risk that do not involve such deliberate behaviors.