Question

Briefly explain the meaning of moral hazard, and identify two ways in which an insurer can design a policy covering theft to reduce the risk of moral hazard

Answer 1

A moral hazard is a situation where one party assumes to hold an incentive for increasing the risk exposure as it is not required to bear the total costs arisen from the risk.

This usually happens incase of insurances where the insured takes on higher risk involving activities as it feels secure due to the insurance cover. He feels secure as the risks are shared with the insurance company.

2 ways in which an insurer can design a policy covering theft to reduce the risk of moral hazard :

1. By including the clause of wherein it specifically mentions the minimum level of security measures to be followed by the insured in order to be eligible for the claim. This will ensure that the insured does not act carelessly.

2. It can also setup periodic security report analysis of the insured to ensure that the security level is being maintained.