Hawaii Insurance License Practice Exam

Which term refers to deliberate behavior that leads to a loss covered by insurance?

1. Morale hazard

2. Insurable interest

3. Moral hazard

4. Risk assessment

The correct answer is: Moral hazard

The term that describes deliberate behavior that leads to a loss covered by insurance is known as moral hazard. This concept refers to the risk that an individual or entity may take on more risk because they are insulated from its potential consequences, typically due to the presence of insurance. When individuals believe they will be compensated for losses caused by their own actions, they might engage in reckless or negligent behavior, thereby increasing the likelihood of a loss occurring. In the context of insurance, it's crucial for underwriters and insurers to understand moral hazard as it directly impacts their risk assessments and pricing. The presence of moral hazard can lead to higher overall claims, which can make it more costly for insurers to operate. It’s essential for insurers to implement measures to mitigate moral hazard, such as requiring deductibles or co-pays, to encourage policyholders to act responsibly to prevent losses. Other concepts, while related to insurance, do not specifically address the deliberate nature of actions leading to insured losses. For example, morale hazard refers to an indifference to loss due to being insured, rather than the intentional actions of the insured. Insurable interest denotes the financial stake a person has in the property or life they insure, while risk assessment is the broader process of evaluating potential risks and determining coverage