Definition
Moral Hazard
Moral hazard is the increased risk that arises when being insured changes a person's behaviour, making them less careful or more prone to claim.
Once insured, a policyholder may take less care, for example driving recklessly because the car is covered, or seeking unnecessary treatment because hospitalisation is reimbursed. Moral hazard increases claim costs beyond what pure chance would suggest.
Insurers counter moral hazard with tools like deductibles, co-payments, no-claim bonuses, waiting periods and exclusions, which keep the insured financially exposed enough to stay cautious. Distinguishing genuine claims from behaviour-driven ones is a core challenge in pricing and claims management.
Related terms
- DeductibleA deductible is the amount you must pay yourself before your insurance starts covering a claim.
- Adverse SelectionAdverse selection is the tendency for higher-risk individuals to seek insurance more eagerly than lower-risk ones, skewing the risk pool.
- Co-PaymentCo-payment is a clause requiring the policyholder to bear a fixed percentage of every admissible health claim, with the insurer paying the rest.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.