Insurance Broker Certification Practice Exam

The potential for increased risk due to an applicant's attitude towards loss is referred to as?

1. Moral hazard

2. Peril

3. Morale hazard

4. Loss

The correct answer is: Morale hazard

The correct answer, morale hazard, refers to the increased risk that arises from an individual's attitude or behavior regarding loss, particularly after securing insurance coverage. This type of hazard occurs when an insured party is less careful or more reckless about protecting their property or minimizing losses because they have insurance in place. For instance, if a person believes that any damage to their property will be covered by insurance, they might take greater risks or neglect preventative measures. Understanding morale hazard is crucial for insurance brokers as it impacts underwriting decisions and insurance premiums. While an applicant's character and intentions are related to moral hazard—where a person might deliberately engage in riskier behavior because they have insurance—morale hazard focuses on the change in behavior that may occur subconsciously when insurance is obtained. Peril, on the other hand, refers to the actual cause of loss or damage (like fire, theft, or natural disasters), while loss pertains to the financial impact of such events. Thus, while all these terms relate to the field of insurance, morale hazard specifically encapsulates the psychological aspect of risk influenced by an insured individual’s mindset.