Moral hazard means the likelihood that a client's behavior will change as a result of purchasing a life insurance policy and that change will increase the chance of a loss. Life insurance companies look to ensure that the act of purchasing life insurance does not make it more likely for someone to end their own life or the life of another. Moral hazard increases the likelihood of a claim being filed. Although the terms bear some resemblance, a moral hazard is not the same thing as a morale hazard. While a moral hazard refers to a conscious choice to participate in risky behavior due to increased coverage, morale hazard refers to the unconscious shift toward riskier conduct. moral hazard. n. (Insurance) insurance a risk incurred by an insurance company with respect to the possible lack of honesty or prudence among policyholders. Collins English Dictionary – Complete and Unabridged, 12th Edition 2014 © HarperCollins Publishers 1991, 1994, 1998, 2000, 2003, 2006, 2007, 2009, 2011, 2014. From Longman Business Dictionary moral hazard ˌmoral ˈhazard [uncountable] INSURANCE the idea that some people or companies are a bigger insurance risk than others, because of their past behaviour or their present situation. Moral hazard refers here to the tendency of insurance protection to alter an individual’s motive to prevent loss. This affects expenses for the insurer and therefore, ultimately, the cost of coverage for individuals. Moral hazard occurs when a consumer takes an additional risk in the knowledge that a third party will pay for the cost. So the additional cost is created AFTER the consumer purchases an insurance policy. By contrast, adverse selection refers to a situation where the buyer and seller have different information BEFORE the transaction. Physical hazard relates to the subject matter of insurance, whereas, moral hazard relates to the character, integrity and mental attitude of the insured. Physical hazard can be seen, assessed and rated accordingly, but moral hazards cannot be seen, assessed or rated accordingly. Moral hazard is the idea that insurance promotes risk-taking for personal gain. Moral hazard describes a conscious change in behavior to try to benefit from an event that occurs. Conversely A moral hazard is a term used in reference to situations in which one entity takes advantage of another when they realize they will not be held responsible for actions that may be illegal or otherwise socially and morally unacceptable. The term originated in the insurance industry and spread to the financial sphere. Moral Hazard — a term used to describe a subjective hazard that tends to increase the probable frequency or severity of loss due to an insured peril. Moral hazard is measured by the character of the insured and the circumstances surrounding the subject of the insurance, especially the extent of potential loss or gain to the insured in case of loss.
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