Question

an insurance company must be concerned about the possibility that someone will buy fire insurance on a building and then set fire to it. this is an example of moral hazard. True, False or Uncertain. Support your answer with an explanation.

Answer 1

Answer: True

Explanation:

Moral hazard is a circumstance where one gathering engages in a hazardous occasion realizing that it is ensured against the hazard and the other party will bring about the expense. It emerges when both the gatherings have deficient data about one another.

In an insurance-related market, there is a hazard that the borrower may take part in exercises that are unwanted from the bank's perspective since they make him less inclined to repay credit.

It happens when the borrower realizes that another person will pay for the slip-up he makes. This thus gives him the motivating force to act in a more dangerous manner. This financial idea is known as a moral hazard

Model: You have not safeguarded your home from any future harm. It suggests that misfortune will be totally borne by you at the hour of a mishappening like fire or robbery. Consequently, you will show additional consideration and mindfulness. You will introduce cutting edge thief cautions and contract guardians to maintain a distance from any unexpected occasion.

In any case, In case that your home is safeguarded for its full worth, at that point in the event that anything happens you don't generally lose anything. In this way, you have a less motivating force to ensure against any mishappening. Right now, insurance firm bears the misfortunes and the issue of good risk emerges