Moral Hazard

Circumstance that increases the probability of occurrence of a loss, or a larger than normal loss, because of a change in an insurance policy applicant’s behavior after the issuance of policy. It may be due to the presence of incentives that induce the insured to act in ways that incur costs the insurer (but not the insured) has to bear. For example, overinsurance or substitution of insured valuable-assets with junk. In common usage, moral hazard suggests a conscious malicious or even illegal motivation, as opposed to an unconscious change in behavior. Compare with morale hazard.

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