[amp_mcq option1=”Increased risky behaviour following the purchase of insurance” option2=”Increased risky behaviour prior to the purchase of insurance” option3=”Decreased risky behaviour following the purchase of insurance” option4=”Engaging in criminal acts post being insured” correct=”option1″]
The correct answer is: A. Increased risky behaviour following the purchase of insurance.
Moral hazard is a situation where an individual or entity takes on more risk because they are insured against the consequences of that risk. For example, if a person has car insurance, they may be more likely to drive recklessly, knowing that they will not have to pay for any damages they cause in an accident.
Option B is incorrect because it is not possible to increase risky behavior prior to the purchase of insurance. Option C is incorrect because it is not possible to decrease risky behavior following the purchase of insurance. Option D is incorrect because engaging in criminal acts is not a form of risky behavior.
Moral hazard is a significant problem for insurance companies, as it can lead to higher premiums for all policyholders. Insurance companies try to mitigate moral hazard by carefully selecting who they insure and by imposing restrictions on insured individuals’ behavior.