Question

Discuss How moral hazard exists in insurance markets.

Answer 1

Ans.)

Moral hazard is the problem in Economics which arises due to assymetric information and states that an individual might engage in activities which could be detrimental for other individual.

In Insurance, the insurer protects an individual financially by compensating him/her for the loss against any incident such as fire, theft etc which develops a careless behavior in the insured and he might be less willing to take care of the loss that could occur due to his actions.

For example, after taking the theft insurance, the individual might not lock his vehicle in the public place and the consequences would have to be ultimately borne by the insurer.This result of the actions of the individual is called moral hazard and is thus present in the insurance industry as well.