Page 369 - IC38 GENERAL INSURANCE

4. Moral hazard

Moral hazard could arise in the following ways:

a) Dishonesty

An extreme example of bad moral hazard is that an insured taking insurance
with deliberate intention of creating or making a loss to collect a claim.
Even, an honest insured may be tempted to stage a loss, if he happens to be
in financial difficulties.

b) Carelessness

Indifference towards loss is an example of carelessness. Because of the
existence of insurance, the insured may tend to adopt a careless attitude
towards the insured property.

If the insured does not take the same care of the property as a prudent and
reasonable man would if he were uninsured the moral hazard is
unsatisfactory.

c) Industrial relations

Employer-employee relationship may involve an element of bad moral
hazard.

d) Wrong claims

This kind of moral hazard arises when claims occur. An insured may not
deliberately bring about a loss but once a loss occurs, he would attempt to
demand unreasonably high amount of compensation, in total disregard of
the principle of indemnity.

Example

Examples of such moral hazard arise in personal accident insurance, where the
claimant would tend to prolong his period of disablement in order to obtain
more benefits of insurance than is justified by the nature of injury.

In motor claims such a hazard would arise when the insured unreasonably insists
on replacement of new parts whereas the damage could be satisfactorily
repaired or attempts to carry out certain repairs or replacements which are not
related to accidental damage.

Moral hazard can be reduced using the mechanisms of co-payment, deductible,
sub-limits and offering incentives like no-claim bonus in health insurance.

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