What does the term “moral hazard” refer to in the context of insurance?

In the context of insurance, "moral hazard" refers specifically to the phenomenon where having insurance protection may encourage individuals to engage in riskier behavior than they would if they did not have coverage. This occurs because the insured party may feel less accountable for potential losses, knowing that they will be compensated by their insurer in the event of a claim.

For instance, a person with comprehensive auto insurance might drive less cautiously because they believe that any damage will be covered by their policy. This shift in behavior underlines the core concept of moral hazard, highlighting how the presence of insurance can inadvertently lead to actions that increase the likelihood of a loss occurring. Thus, understanding moral hazard is critical for both insurers and policyholders, as it impacts risk management strategies and the overall cost of insurance.

The other options do not accurately define moral hazard; they discuss other aspects of insurance—like risk shifting and premium calculations—but miss the essential concept of behavior changes resulting from the safety net that insurance provides.