Moral Hazard
The increased probability of loss that arises when an insured has an incentive to allow or cause a loss because they are protected by insurance.
businessPublished 2026/06/07Last verified 2026/06/07
FAQs
- How do deductibles reduce moral hazard?
- Deductibles ensure the insured retains a portion of every loss, giving them a financial stake in loss prevention. When the insured bears the first $10,000 of any claim, the incentive to neglect loss prevention or inflate small claims is reduced.
- Is moral hazard the same as insurance fraud?
- They overlap but are not identical. Insurance fraud is the criminal act of obtaining insurance benefits through intentional deception. Moral hazard is the broader behavioral economics concept encompassing any increase in risk-taking or loss tolerance resulting from coverage. Fraud is a specific criminal manifestation of moral hazard.
- Can moral hazard exist without bad intent?
- The classical definition of moral hazard in insurance implies intent or at least awareness of incentive. However, some economists use the term more broadly to include any behavior change resulting from coverage. In underwriting practice, moral hazard retains its connotation of intentional or purposeful conduct.
Related Terms
Morale Hazard
The increase in loss probability resulting from an insured's carelessness or indifference to loss prevention because they are covered by insurance.
Hazard Analysis
The systematic evaluation of physical, moral, and morale conditions that increase the probability or severity of a loss for a specific risk.
SIU Referral
The process of routing a suspicious claim to the Special Investigations Unit for investigation of potential fraud before settlement.
Risk Appetite Statement
A formal document articulating the types, volumes, and characteristics of risk a carrier or MGA is willing to write, used to guide underwriting decisions.