What does moral hazard refer to in insurance?

Moral hazard in insurance refers to the risk that the behavior of the insured party may change in a way that increases the likelihood of a loss. This change in behavior can manifest as carelessness or even fraudulent actions after obtaining insurance coverage. When individuals or businesses feel protected by their insurance, they may engage in riskier behavior or take less care to prevent losses, knowing that their insurer will cover the damages. This phenomenon underscores the importance of insurers monitoring insured behaviors and implementing measures to mitigate risks.

The other choices pertain to different types of risk but do not capture the specific behavioral aspects that define moral hazard. Neglecting preventative measures is a component of moral hazard but does not encompass all scenarios where behavior leads to increased risk. Natural disasters are external events and not influenced by the actions of the insured, while economic changes relate more to market risks rather than the individual conduct that creates moral hazard.