When people who buy insurance change their behavior after the purchase because they are protected from loss by the insurance, the insurance market is said to face the problem of

Question

Quizplus · Accepted Answer

Moral hazard is the problem faced by insurance markets when insured parties change their behavior to take on more risk because they are protected by insurance. For instance, individuals may engage in riskier behavior or neglect to take precautions against potential losses because they feel that they are protected from the consequences of their actions by their insurance policy. This can lead to increased claims and higher costs for insurers, which can negatively impact premiums and profitability in the market. Therefore, option A is the correct answer.

When People Who Buy Insurance Change Their Behavior After the Purchase