Texas All Lines Adjuster Practice Test

How does moral hazard typically affect insured individuals?

1. They take fewer risks

2. They are less likely to file claims

3. They may take on riskier behavior knowing they are insured

4. They become more cautious in their actions

The correct answer is: They may take on riskier behavior knowing they are insured

Moral hazard refers to the situation where individuals may alter their behavior when they are insulated from risk, often due to insurance coverage. In the context of insured individuals, moral hazard suggests that having insurance can lead people to engage in riskier behavior because they feel protected from the financial consequences of their actions. For example, a person with health insurance might be more inclined to participate in extreme sports or neglect preventive health measures since they believe that their expenses will be covered in the event of an injury or illness. This shift in behavior occurs because the individual's perception of risk is altered by the presence of insurance, resulting in a tendency to take greater risks than they might if they were uninsured. As such, the correct answer highlights the essence of moral hazard, emphasizing the behavioral changes that can occur when individuals feel shielded from potential negative outcomes due to insurance coverage.