Question

Why is the "moral hazards" a concerns to many of the financial market observers?

Thank you.

Answer 1

Moral hazards mean once a person buys the insurance, then insured no longer puts the effort to prevent the loss to the insured product. Say once a house is insured, then the insured may no longer care to buy the fire extinguisher. In auto insurance for example, once the car is insured, the owner has no incentive to prevent the damage to the car as the car is insured and the risk is upon the insurer.

This moral hazard behavior is a cost to the insurance company and hence it is of great concern to many of the financial market observers. In addition, it is difficult to prevent or detect moral hazard behavior.

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