Alabama Insurance Adjuster Practice Exam

What is typically a consequence of committing a moral hazard?

1. Altered accident rates

2. Increased premiums

3. Higher deductibles

4. Reduced coverage options

The correct answer is: Increased premiums

A moral hazard arises when an individual or entity takes on risk because they are insulated from the consequences of that risk, often due to the safety net provided by insurance. This behavior can lead to a situation where the insured party may not act as carefully as they would without insurance, potentially increasing the frequency or severity of claims. When insurers recognize that moral hazard is a factor in claims being made, they often respond by adjusting their rates to mitigate their financial risk. As a result, one typical consequence is an increase in premiums. Insurers may raise the premiums to cover the expected higher cost of claims that result from behaviors influenced by moral hazard, thereby ensuring they maintain profitability while still providing coverage. The other options do not directly relate to the concept of moral hazard in the same way. Altered accident rates might be a side effect of increased risk-taking, but it is the financial implications, like increased premiums, that come from the insurer's response to those altered behaviors. Higher deductibles and reduced coverage options may be strategies insurers employ to manage risk, but they are not direct results of moral hazard; they are more reflective of broader risk management practices rather than the immediate financial impact of moral hazard itself.