What characterizes a moral hazard?

A moral hazard is characterized by the behavior of the insured that poses a greater risk of loss than would normally occur. This typically arises when a person feels insulated from the consequences of risky behavior due to insurance coverage. When someone engages in fraud or negligent acts, they exploit the protection that insurance provides, leading to an increased likelihood of claims being made.

For instance, if an individual knows they are covered against theft, they might take less care to secure their belongings, thus increasing the chance of a loss that they can claim. This behavior directly correlates with the concept of moral hazard, as it reflects a change in the insured's attitude towards risk when they are not bearing the full costs of potential losses.

In contrast, increased safety measures and acting carefully are indicative of reduced risk behaviors, which do not exemplify moral hazards. Enforcement of stricter regulations by insurers is aimed at mitigating such risks but does not define the behavior that characterizes moral hazard itself.