What does 'moral hazard' refer to in insurance?

Moral hazard refers to the phenomenon where the behavior of the insured changes after obtaining insurance coverage, leading to an increased risk of loss. When individuals or businesses know they are protected by insurance, they may engage in riskier behavior or neglect preventive measures that they would typically undertake if they were uninsured. This change in behavior can result in higher claims frequency for insurers, which is a significant consideration in underwriting and pricing policies.

Understanding moral hazard is crucial for insurers, as they strive to implement strategies such as deductibles, co-payments, and monitoring measures to mitigate potential excesses in risky behavior following policy acquisition.