If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce

Question

Quizplus · Accepted Answer

By requiring firms to install automatic sprinkler systems, the insurance company is reducing the moral hazard problem. Moral hazard occurs when the insured party takes more risks because they are protected by insurance. By installing automatic sprinkler systems, the insured party is less likely to take risks that could lead to a fire, reducing the likelihood of the insurance company having to pay out a claim.

If a Fire Insurance Company Requires Firms Buying Fire Insurance