Explain Concept of Moral Hazard in relevance to age and litigiousness.

1 Answer

Moral hazard is a term describing how behavior changes when people are insured against losses. If, for example, your car is fully insured against any and all damage and there is no deductible, then you would have no incentive to avoid minor accidents, like scratches or backing into poles, beyond the inconvenience of getting the car fixed. You would be much more likely to take risks that could lead to minor car damage knowing that any damage is fully covered. Moral hazard is the dishonesty or character defects in an individual that increase the frequency of accident and badness. It is difficult to control. The insurance try to control moral hazard by various policy and provisions regarding insurance. Careful underwriting of applicants for insurance can also controls the frequency of moral hazard. Moral hazard increases the unfair claims and payments. So it is harmful for insurance business. Because of moral hazard, premiums are higher for everyone.
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