A man has what he believes is a mild heart attack but he doesn't go to the hospital. Instead he calls his insurance agent and doubles the amount of his life insurance. This is an example of the moral hazard problem in insurance.

Question

Quizplus · Accepted Answer

This is an example of adverse selection, not moral hazard. Adverse selection occurs when one party in a transaction has more information than the other, typically the buyer knowing more than the seller, leading to a potential imbalance in the transaction. In this case, the man knows about his health risk but the insurance company does not. Moral hazard, on the other hand, would occur if, after getting insurance, the man engages in riskier behavior because he knows he's covered.

A Man Has What He Believes Is a Mild Heart