What does moral hazard refer to in insurance terms?

Moral hazard refers specifically to the situation where an individual or entity might take on riskier behavior because they have insurance coverage. In insurance terms, this concept highlights that once insured, the insured parties may have less incentive to avoid risks or may even engage in reckless behavior, as they believe that they will not bear the full consequences of their actions. This results in an increased likelihood that a loss will occur because the insured might intentionally cause or exacerbate a loss, knowing that the insurance will cover it.

For instance, if a person has insurance on their home, they might be less careful about locking their doors or maintaining their property because they know that any loss from theft or damage will be compensated by their insurance policy. This potential behavior shift is a core element of moral hazard.

The other choices do not accurately represent moral hazard. The cost of insuring property against theft, high premiums for valuable properties, and the likelihood of premium payment delinquencies are related concepts in insurance but do not capture the essence of moral hazard, which deals directly with behavior changes induced by insurance coverage.