Insurance Broker Certification Practice Exam

What might lead an insurer to suspect a moral hazard?

1. When a policyholder provides truthful information about their health

2. When a policyholder exaggerates their financial status

3. When a policyholder is not honest about their health on an application for insurance

4. When a policyholder has a prior insurance claim

The correct answer is: When a policyholder is not honest about their health on an application for insurance

When a policyholder is not honest about their health on an application for insurance, it raises red flags for insurers regarding a moral hazard. A moral hazard refers to the risk that an individual may engage in behavior that increases the likelihood of a loss because they do not bear the full consequences of that behavior. In the context of insurance, if a policyholder conceals or misrepresents their health status, they might be seen as more likely to engage in risky behavior or make a claim they would otherwise avoid if they had been truthful. Insurers depend on accurate information to assess risk properly and set premiums accordingly. When honesty is compromised, it creates an environment where the insurer may not adequately gauge the risk profile of the policyholder, potentially leading to significant losses. This behavior implies that the policyholder may not have the same incentive to avoid making a claim since they have already taken advantage of the system by withholding critical information. Thus, dishonesty in health matters directly correlates with the insurer's suspicion of moral hazard.