What is Moral Hazard? 

The moral is a person's behavior towards himself /herself, society, organization, and others. Hazard is something that is happening and is not good. A person may be morally good or bad. It depends on his attitude, ethics, integrity, and values. A person may have the highest reverence for money to that for the truth. In this case, the person may lie and it is said that the person is morally bad. 

Examples of Moral Hazard 

Let us take one example to understand this Moral Hazard practically. A person who had insured his article or valuable that may be at risk becomes reluctant to take care of his article. The reason for this is that he knows that the article is insured. In case of damage or loss of that article, the person would get a claim from the insurance company. This behavior would result in a monetary loss for insurance companies. 

More about Moral Hazard 

Today everything almost every article gets insurance coverage from insurance companies. There has been competition among insurance companies concerning business volume in the market. Each company tries to have a sound financial graph for business volume. Insurance companies go for insurance coverage of articles and valuables to earn a premium. The consumer has an incentive to subscribe to these insurances because they provide a cover to their valuables. 

Moral Hazard from Consumer Point of View 

Once a consumer has secured its article under insurance coverage, they become reluctant to keep that article with care. One thought that they always have in their mind is that the article is insured. The consumer is aware of the promised sum assured by the insurance company in case of any damage to that article. 

Insurance coverage to mitigate Financial Risk 

With the service of the insurance company and coverage of various valuables under insurance coverage, the financial risk of loss or damage of goods has been ensured. Insurance coverage of valuables cannot protect them from loss or damage or any other risk. However, the financial losses with that article could be minimized with the insurance cover. The financial risk of the consumer can be stabilized with the insurance coverage of the valuables of the consumer. However, because of the moral hazard of consumers, the damage or loss of valuables because of negligence will have a financial burden on the insurance company. 

Type of Insurance and Moral Hazards

Today there have been numerous kinds of insurance. These are General Insurance, Life Insurance, Health Insurance, and others. With each type of insurance, the importance of moral hazards cannot be ignored. Also, the specific risk is associated with each valuable and health as well. If the individual behavior is ethical and of good values, the problem because of moral hazard could be mitigated. The loss of damage of valuables would be reduced to a great extent if proper and due care is given to valuables. 

Moral Hazard associated with General Insurance: Once valuable is insured under insurance coverage. The due care that was expected is lacking. The individual is confident the in case of loss of that goods, he would receive an equivalent loss amount or theft claim. Because of this negligence of consumer, the insurance companies which are in the service of providing insurance coverage to general goods are facing financial problems. Some of these companies are running in losses. This problem of insurance companies could be reduced if people become more value-based and give proper and due care to goods. So, the goods could remain intact for a long period. 

Moral Hazard and Health Insurance: Health insurance has been boon to people. The disease does not give prior information and comes suddenly. In the present time where the entire world is facing the COVID-19 pandemic, health insurance coverage is essential for all. The amount of risk associated with this disease is more as it spreads from one person to another very soon if proper social distancing is not kept with the infected or covid-19 positive patient. Once one gets medical insurance, then it cannot protect or shield him from the pandemic but surely back up with finance in getting cured and cover all the entire hospital bills. So, despite having coverage the people must keep themselves healthy to avoid any disease. 

Life Insurance and Moral Hazard: Life insurance provides insurance coverage to an individual. The sum assured depends on the earning capacity and the risk associated with the health. As per moral conduct, one must not engage in risky work deliberately afterlife insurance coverage. 

Incentives by Insurance companies: The insurance companies are providing incentives to consumers who did not claim any insurance in a particular year. This is one of the best strategies of companies to promote the right attitude among consumers. It will enable consumers in taking care of their valuables. To get these incentives consumers do not engage in a risky situation. And they take care of their valuables to avoid any further risk and losses or damage. Such kind of strategy promotes morals, integrity and values, and ethical practices among consumers. In the long run, such a values-based attitude, the behavior of consumers will help insurance companies as well as individuals. The insurance companies that are processing claims because of moral hazards would be reduced to a great extent. 

Context and Applications

The topic Moral Hazard is important for the students pursuing the below-mentioned disciplines. Insurance Markets are growing every day. 

• Masters in Economics  
• Master in Business Administration (Life Insurance & General Insurance) 
• Masters in Commerce 
• Bachelors in Economics 
• Bachelors in Commerce 
• Apart from the above, professionals engaged in insurance companies and working under different capacities of the underwriter, claim manager, surveyor, economist, and professors, and teachers of economics would also need some insights into the topic. 

Practice Problem 

Problem: What is Moral Hazard concerning insurance companies? 

Solution: Moral is all about individual behavior and attitude towards oneself, others, and society. Hazard is something that occurred or happened and is not good and not expected. So, Moral Hazard can be defined as the behavior and attitude of the individual which is not based on ethics and values, and righteousness. It is the behavior of an individual when one does not give proper due care to its valuables. The consumers once insured its valuables did not take care of its valuables. They develop the notions that their goods are insured and in case of damage or loss they would get the claim from the company. However, it creates a financial problem and the worst situation for the insurance companies.