What does the term 'moral hazard' refer to in insurance?

The term 'moral hazard' refers to the increased risk that arises from an insured individual's behavior once they have acquired insurance coverage. This phenomenon occurs because the insured person may engage in riskier behavior or have a reduced incentive to act cautiously, knowing they are protected financially by their insurance policy. For example, a person with comprehensive car insurance might drive less carefully, as they feel less impact from potential damages due to coverage.

This concept is crucial in the insurance industry because it highlights the importance of risk management and monitoring insured individuals to mitigate the potential negative effects of moral hazards on claims and costs. It underscores the need for insurers to carefully assess risks and implement measures such as deductibles or regular assessments to encourage responsible behavior among policyholders.

The other options do not accurately capture the essence of moral hazard. They address different aspects of insurance and risk management, but they do not pertain to the behavioral implications of having insurance coverage.