Define 'moral hazard' in insurance.

Moral hazard refers to the behavior change that occurs when an individual or entity is insulated from risk, typically because they have insurance coverage. When a person knows that they are protected against losses by their insurance, they may take on greater risks than they otherwise would. This is because they don't bear the full consequences of their actions, as their insurer will cover the losses associated with those increased risks.

In this context, moral hazard highlights the potential for individuals to engage in riskier behaviors once they have insurance, which can lead to higher costs for insurance companies and, subsequently, higher premiums for all policyholders. Understanding moral hazard is critical in the insurance sector as it influences underwriting and pricing strategies.

The other choices touch on different concepts related to insurance, such as reductions in coverage for cost-saving or assumptions about policyholder honesty, but they do not capture the essence of moral hazard, which specifically involves the shift in behavior stemming from the presence of insurance coverage.