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A moral hazard is when insurance has an effect of encouraging the person benefiting from the insurance to allow an increased risk of loss.
For example, a person who purchases full insurance on a rental car, protecting against all dents and scrapes of any kind, is less likely to take good care of the car because he knows that he will not have to pay for any damage to it.
Moral hazards have a circular effect in increasing the cost of insurance due to greater losses than would occur in the absence of insurance.
For example, a person who purchases full insurance on a rental car, protecting against all dents and scrapes of any kind, is less likely to take good care of the car because he knows that he will not have to pay for any damage to it.
Moral hazards have a circular effect in increasing the cost of insurance due to greater losses than would occur in the absence of insurance.