California Life and Health Insurance Practice Exam 2026 – Complete Test Prep

Moral hazards refer to situations where individuals take on greater risks because they have insurance coverage. This concept stems from the idea that when people know they are protected against a loss, they may engage in riskier behavior than they otherwise would if they were fully responsible for the consequences of their actions. For example, someone with comprehensive auto insurance might drive more recklessly than they would without insurance, knowing that any damages would be covered.

This phenomenon can lead to increased claims and losses for insurers, as policyholders may not feel the same level of vigilance or caution when their financial liability is mitigated by their policy. Understanding moral hazards is crucial for insurance companies since they need to develop policies and safeguards to minimize such risks and ensure that insured individuals maintain responsible behavior even when covered by insurance.