Question

When people have insurance against a certain event, the notion that those people are less likely to guard against that event occurring is called a _____________________ .

Answer 1

Answer: When people have insurance against a certain event, the notion that those people are less likely to guard against that event occurring is called a moral hazard.

Explanation: Moral hazard happens frequently in cases of insurance. If a person has a house, they can decide to install a vault because it reduces the risk of being robbed;

However, when the same person has arranged an insurance that covers the risk of theft of the house, they will have fewer incentives than in the previous situation, to install the security door and ultimately it will be able to increase the probability of the loss in this Theft case. This behavior, for example, before insurance coverage is called moral hazard.