What does "moral hazard" mean in insurance terms?

Moral hazard refers to a situation in which the behavior of the insured changes as a result of having insurance coverage. This means that individuals may engage in riskier behavior because they do not bear the full consequences of that behavior, knowing that the insurance will cover losses resulting from their actions. In the context of the choices provided, selecting the increased risk of loss when the insured is not responsible captures the essence of moral hazard well.

When individuals are covered by insurance, they might not feel as motivated to avoid risky behavior because they rely on the insurance to mitigate the financial consequences of their actions. Consequently, this can lead to a higher chance of losses occurring, as those insured may act with less caution.

In contrast, the other options do not accurately encapsulate moral hazard. While negligence and insurance fraud relate to risk and claims, they do not directly address the behavior change aspect inherent in moral hazard. This focus on behavioral change is crucial to understanding the concept in terms of insurance.