California Life and Health Insurance Practice Exam

What term describes the increased likelihood of loss due to an insured's dishonesty?

1. Moral hazard

2. Physical hazard

3. Legal hazard

4. Emotional hazard

The correct answer is: Moral hazard

The term that describes the increased likelihood of loss due to an insured's dishonesty is moral hazard. This concept refers to a situation where a person's behavior changes as a result of having insurance coverage. When individuals perceive that they are protected against certain risks or losses, they may engage in riskier or less responsible behavior, potentially leading to more frequent claims. This aspect of moral hazard underscores the importance of trust and integrity in insurance arrangements, as dishonesty can lead to greater financial risk for the insurer. Understanding moral hazard is crucial for insurance professionals, as it informs underwriting practices and risk management strategies. For instance, insurers may implement measures like thorough background checks or setting conditions for coverage to mitigate the risk associated with dishonest behavior. In contrast, other types of hazards, such as physical or legal hazards, relate to tangible risks and regulatory issues, but they do not specifically address the role of personal behavior influenced by the availability of insurance.