Question

1. How do deductibles affect moral hazard?

2. How can insurance companies attempt to prevent or minimize moral hazard other than deductibles?

3. What are the risks of using only the data that the policyholder provides the insurance company?

4. What risks does a policyholder take on when they purchase insurance?

Answer 1

Answer to Q no 1

Deductibles help insurance companies to mitigate the risk of Moral Hazard . A moral hazard is the risk that a policyholder may not act in good faith . Insurance policies protect policyholders from losses , so an inherent moral hazard exists . A deductible mitigates that risk because the policyholder is responsible for a portion of the costs . In effect , deductibles serve to align the interests of the insurer & the insured so that both parties seek to mitigate the risk of loss.

Answer to Q no 2

Moral Hazard can be prevented by - Investigations to prevent insurance fraud are one of the way of reducing the extreme cases of moral hazard .

Co-payment - where the policyholder must pay a small amount and the rest is paid by the insurance company .

Co- insurance - it means that the insurance company covers a certain percentage of the cost . for e.g insurer might pay 80 % of the costs & the policyhoder pay the another 20 % .

Answer to Q no 3

There is significant amount of risk associated with using the only data provided by policyholders because they can forge the documents & provide wrong information . for e.g they can conceal any disease in a life insurance due to which the insurance company might face a loss. Hence the insurance company should also do their part of assessment before providing the policy .

Answer to Q no 4

There are some terms & conditions upon fulfillment of which the insurance company pays the proceeds like indulging in risky behaviour may be excluded from some forms of insurance .

Insurance is a way of compensating you for the loss when an insured event occurs , provided that you have managed the forseeable risks . It is a condition in most insurance policies that the policyholder has taken all the necessary safety preaution . In case if it is not so then in case of an accident , the claim will not be processed.