Insurance Broker Certification Practice Exam

What is a key distinction of moral hazards in insurance?

1. They are always visible risks

2. They involve potential deceit

3. They pertain exclusively to health insurance

4. They only occur with property insurance

The correct answer is: They involve potential deceit

A key distinction of moral hazards in insurance is their relationship to potential deceit or unethical behavior by the insured. This concept arises when individuals may take greater risks or act irresponsibly because they know they have insurance coverage that will mitigate the consequences of their actions. For example, if a person knows that their auto insurance will cover damages from an accident, they might drive more recklessly than they would without that coverage. This behavior reflects a moral hazard because it is tied to a change in a person's actions due to the presence of insurance, which can lead to increased claims and greater losses for insurance companies. The other options do not accurately capture the essence of moral hazards. Moral hazards are not always visible risks; they can be subtle and are often not directly observable. Additionally, moral hazards are not limited to health insurance or property insurance; they can occur in any type of insurance where the insured might feel incentivized to engage in risky behavior due to a safety net provided by coverage. Thus, the defining feature is indeed the potential for deceit or irresponsible conduct influenced by the insurance protection.