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

The term "moral hazard" specifically refers to the potential for dishonest behavior or fraudulent actions by the policyholder when making claims. This arises when individuals feel insulated from the repercussions of their actions due to insurance coverage, leading to increased risk-taking or dishonest behavior. For instance, if someone has comprehensive coverage on their car, they might be less careful about locking their vehicle or securing it against theft, knowing that any loss may be compensated by the insurance. This shift in behavior due to the presence of insurance is a classic example of moral hazard.

In contrast, the other options describe different types of risks associated with insurance:

• Negligence refers to failure to take reasonable care, which can lead to losses but does not encompass the fraudulent intent implied by moral hazard.

• The likelihood of physical damage is more aligned with pure risks that can be quantified and are separate from moral considerations.

• Market fluctuations relate to economic variables affecting investments and do not directly connect to the behavior of policyholders in the insurance context.