South Carolina Personal Lines Practice Exam

Which hazard type is associated with the actions or behaviors of individuals?

1. Physical hazard

2. Moral hazard

3. Morale hazard

4. Environmental hazard

The correct answer is: Moral hazard

Moral hazard specifically refers to the risk that arises from the behavior and actions of individuals, particularly when they engage in riskier behavior because they are insulated from the consequences, often due to insurance coverage. When individuals do not bear the full consequences of their actions, such as when they know that their insurance will cover losses, they may be more likely to take risks they would otherwise avoid. In the context of insurance, moral hazard becomes a concern because it can lead to increased claims and loss ratios for insurers if policyholders behave recklessly. For instance, if someone knows their car is insured, they might be less cautious about leaving it unlocked or driving recklessly. This risk associated with human behavior and decision-making sets moral hazard apart from other types of hazards, such as physical hazards, which are tangible risks (like icy roads), or morale hazards, which stem from a person's attitude towards risk rather than their actions. Understanding moral hazard is crucial for both insurers and policyholders to mitigate risks effectively and maintain a fair system.