What is the term for hazards caused by insured persons engaging in risky behavior due to the expectation of indemnification?

• A. Moral Hazard
• B. Physical Hazard
• C. Risk Factor
• D. Operational Risk

Answer: (A)

The term that describes hazards arising when insured individuals engage in risky behaviors with the belief that they will be indemnified by their insurance is known as "Moral Hazard." This concept refers to the change in behavior that occurs when individuals feel secure because they have insurance coverage. As a result, they may take on risks they would otherwise avoid, knowing that any potential losses will be compensated by their insurance policy.

The essence of moral hazard is the psychological aspect of risk-taking; individuals may feel less inclined to practice caution or preventative measures once they have insurance, believing that the financial repercussions of their actions will be mitigated by their coverage. This is significant in insurance contexts as it may lead to higher claims or unsafe practices, impacting the overall risk pool and potentially driving up costs for insurers.

In contrast, other terms like physical hazard relate to actual physical conditions that increase the chance of a loss, such as hazardous materials in a building. Risk factors refer more broadly to elements that contribute to risk but do not specifically denote behavior influenced by coverage. Operational risk typically relates to business processes and systems rather than individual behavior concerning insurance. Understanding moral hazard is key for both insurers and policyholders when managing risks effectively.