Moral hazard in insurance refers to situations where one party (the insured) takes excessive risks because the other party (the insurer) bears the financial consequences. A classic example is when a homeowner with fire insurance fails to take adequate precautions against fire because they know the insurance company will cover any losses.
Moral hazard can lead to higher insurance premiums for everyone, as insurers factor the potential for such behavior into their pricing. It can also lead to disputes between insurers and policyholders over whether a loss was caused by moral hazard.
