South Carolina Life Insurance Practice Exam

In the context of insurance, what does 'moral hazard' refer to?

1. Physical condition that increases risk

2. Intentional actions that increase risk

3. Economic factors that affect pricing

4. Legal issues affecting liability

The correct answer is: Intentional actions that increase risk

In the context of insurance, 'moral hazard' specifically refers to intentional actions that increase the risk of loss. This concept arises when an individual’s behavior changes as a result of having insurance coverage. For instance, a person who is insured may be less diligent in safeguarding their property because they feel financially protected against loss. This moral hazard can lead to riskier behavior, such as purposely underreporting a claim or neglecting preventative measures, which ultimately increases the potential for claims. The other options encompass different types of risks or concerns in the insurance industry but do not capture the essence of moral hazard. A physical condition that increases risk refers to inherent risks associated with health or property that are not influenced by the insured's behavior. Economic factors affecting pricing relate to market dynamics and do not pertain to individual actions that may lead to increased risks. Finally, legal issues affecting liability concern legal responsibilities and ramifications rather than the behavioral changes influenced by insurance coverage.