Moral Hazard

What Does Moral Hazard Mean?

Moral hazard refers to the increased likelihood that a person insuring an asset will either take greater risks with it or provide it with less care.

Insuranceopedia Explains Moral Hazard

Imagine a person without insurance coverage taking their car on the road. They are likely to drive very carefully and defensively, knowing they would bear the full cost of any damage to their vehicle, other property, or liabilities. However, if the same person starts driving more recklessly after acquiring auto insurance, this would be an example of moral hazard. Behavior changes like this are part of why driving history and prior claims weigh so heavily in what factors affect car insurance rates.

Moral hazard is a critical factor for underwriters, as it highlights that past uninsured behavior does not always predict future insured behavior. It increases the probability of a claim being filed. Different insurers weigh these risks differently, which helps explain why quotes from top car insurance companies can vary widely for the same driver.

While the terms may seem similar, a moral hazard and a morale hazard are distinct. Moral hazard involves a conscious decision to engage in riskier behavior due to increased coverage, whereas morale hazard reflects an unconscious tendency toward riskier actions.