What is the definition of "moral hazard" in insurance?

Moral hazard refers to the increase in risk that occurs when an individual is shielded from the consequences of their actions by having insurance coverage. When someone knows that they have protection against financial loss, they may be more inclined to engage in riskier behavior, as the potential negative outcomes are mitigated by their insurance. This can result in a situation where insured individuals might take greater risks than they would if they were fully responsible for the consequences of their actions.

In the context of insurance, moral hazard is a significant concern for insurers, as it can lead to higher claims and financial losses. Insurers often implement various strategies to mitigate this risk, such as deductibles and coverage limits, which encourage policyholders to act more cautiously.

The other options may relate to concepts within risk management or insurance but do not define moral hazard accurately. The idea of reducing risk by taking fewer risks pertains to risk avoidance rather than moral hazard, while prevention of loss through management relates to loss control. An insurance policy that covers all types of risks does not define moral hazard and instead describes the scope of coverage.