Which is an example of a moral hazard?

Which is an example of a moral hazard?

• A. An individual sets fire to a building to collect insurance money
• B. An individual installs a security system
• C. An individual reports a loss promptly
• D. A neighbor witnesses a theft

Answer: (A)

Moral hazard is when having insurance changes how the insured behaves, making them more likely to incur a loss or commit fraud because they don’t bear the full cost. Deliberately setting a fire to collect insurance money fits this because the insured stands to gain financially from the loss and ways to avoid the consequence. The other actions are preventive or responsible: installing a security system reduces risk, promptly reporting a loss aids proper claims handling, and a neighbor witnessing theft is an external event—not a change in the insured’s behavior due to insurance.

Moral hazard is when having insurance changes how the insured behaves, making them more likely to incur a loss or commit fraud because they don’t bear the full cost. Deliberately setting a fire to collect insurance money fits this because the insured stands to gain financially from the loss and ways to avoid the consequence. The other actions are preventive or responsible: installing a security system reduces risk, promptly reporting a loss aids proper claims handling, and a neighbor witnessing theft is an external event—not a change in the insured’s behavior due to insurance.