Question

1. Difference between Moral Hazard and Morale Hazard(Attitudinal hazard), Why Moral Hazard is important concept to insurance company? Give an example

2. The high cost of liability insurance has made some people believe that this kind of insurance should be eliminated because the cost is too high for the society. Do you agree with it? ch. 2 & 19

Answer 1

1. Moral hazard is a condition in which one person or a party gets into in a dangerous event knowing that he or she is protected against the risk and the counter party (the insurance provider) will incur the cost. It arises when both the parties to the contract do not have complete information about each other. Example: A circus artist is not insured, so he is careful about doing difficult acts. He gets insurance and then starts to do dangerous acts is an example of moral hazard.

Morale hazard is an insurance term used to explain an insured individual’s attitude about his or her possessions. It arises when the individual is not concerned about his or her belongings because they know that they are insured. Example: A person buys a mobile phone and pays for insurance for this. After some time, the phone becomes outdated and he is least bothered to care for his phone and wishes that his phone is destroyed so he can get insurance and buy the latest phone.

2. Liability insurance protects individuals and businesses and thus protects the purchaser of the liability insurance from liabilities that arise of lawsuits and allied claims. Although the cost is high in case there is an injury caused to another person and there is a lawsuit, these types of insurance help.

It cannot be said that this type of insurance has to be eliminated because of high cost. There may be some risky businesses like construction business and if an injury to a construction worker does happen, it can protect the construction company from large payouts due to lawsuits. So, if someone feels it’s too high cost, they need not go for this insurance rather than completely eliminate it.