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In insurance analysis, morale hazard is an increase in the hazards presented by a risk arising from the indifference of the person insured to loss because of the existence of insurance. Insurance analysts distinguish this from moral hazard. The use of the term in this way dates back to at least 1968, when it was used in the fourth edition of Casualty Insurance.
This usage differs from that in economic theory (see contract theory). In economics, whenever insurance of a risk causes decision-makers to act in a way that increases the risk, called moral hazard, regardless of whether the change in behavior is conscious or malicious.
Examples of morale hazard
- Insurance can be seen as discouraging preventive measures, such as proper fire prevention. For example, the expectation of federal government disaster aid seems to encourage the residents of Malibu, California to let bushes and trees grow near their houses, as part of their landscaping. This increased vegetation raises the risk of fire damage to their houses. As well, the prospect of federal aid may depress insurance premiums, thus providing people with an incentive to settle in hazardous areas. The Cato Institute argued that the federal government should not subsidize the reconstruction of New Orleans for this reason.
- Automobile insurance reduces the costs to insured people who have accidents, making people less cautious when driving (compared to how they would drive if they paid all of the damages they cause in an accident).
Insurance companies often try to stem the problem of morale hazard by risk reduction measures, such as insisting on the ownership of fire extinguishers (in the case of fire insurance) or offering price reductions (for example, if a burglar alarm is installed in a home). Another defense against morale hazards is deductibles, where policyholders are still responsible for some loss and therefore still motivated to avoid loss, albeit less than if they had no insurance.
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- "Analyzing Hazards" Ludhardt, C. M. & Wiening, E. A. (2005) Property and Liability Insurance Principles, 4th edition. ISBN 978-0-89463-249-5
- Kulp CA, Hall JW. (1968) . Casualty Insurance 4th edition, p. 12. The Ronald Press Company
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