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

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Moral hazard occurs when people change their behavior to take more risks or engage in more dangerous activities because they know they are protected by insurance. This can lead to higher costs for the insurance company and a misallocation of resources. Adverse selection refers to the tendency of people with higher risks to buy insurance more often than those with lower risks. Asymmetric information refers to situations in which one party in a transaction has more information than the other, which can lead to market failures. Economic irrationality is not a well-defined concept in economics.

When People Who Buy Insurance Change Their Behaviour After the Purchase