The correct answer is: C. Both A & B.
Moral hazard is a situation in which a person’s behavior changes when they are insured against a particular risk. For example, a person who is insured against fire may be more likely to leave their stove on unattended, or a person who is insured against theft may be more likely to leave their valuables out in the open.
In the case of advanced age, there is a greater risk of death or illness, which would lead to a larger payout from the insurance company. This could lead to moral hazard, as the insured person may be more likely to take risks that could lead to their death or illness.
In the case of a large sum insured disproportionate to income, there is a greater incentive for the insured person to make a claim, even if they do not have a legitimate claim. This could also lead to moral hazard, as the insured person may be more likely to exaggerate or fabricate a claim.
It is important to note that moral hazard is not always a bad thing. In some cases, it can lead to people taking more risks, which can lead to innovation and progress. However, it is important to be aware of the potential for moral hazard when designing insurance policies.
Here are some additional details about each option:
- Option A: When the age is advanced. As people get older, they are more likely to experience health problems. This means that there is a greater risk of death or illness, which would lead to a larger payout from the insurance company. This could lead to moral hazard, as the insured person may be more likely to take risks that could lead to their death or illness.
- Option B: Large sum insured disproportionate to income. A large sum insured disproportionate to income means that the insured person is insured for more than they could afford to pay out of pocket if they made a claim. This could lead to moral hazard, as the insured person may be more likely to make a claim, even if they do not have a legitimate claim.
- Option C: Both A & B. Both advanced age and a large sum insured disproportionate to income can lead to moral hazard. This is because both of these factors increase the risk of a large payout from the insurance company, which could lead to the insured person taking more risks or making a claim even if they do not have a legitimate claim.
- Option D: None of the three. None of these factors on their own necessarily lead to moral hazard. However, if they are combined, they could increase the risk of moral hazard.