North Carolina Adjuster Practice Exam

Moral hazard refers to a situation where the behavior of the insured changes as a result of having insurance coverage. Specifically, when individuals or businesses know they are protected by insurance, they may take greater risks or act more carelessly than they would if they were fully responsible for potential losses. This increased risk-taking occurs because the financial consequences of those risks are mitigated by the insurance policy.

In this context, moral hazard highlights a key challenge in the insurance industry: ensuring that policyholders do not engage in behavior that could lead to more frequent or severe claims simply because they have insurance. For example, someone with comprehensive auto insurance might drive more recklessly, knowing that any potential damage to their vehicle will be covered.

The other options address different aspects of insurance but do not accurately define moral hazard. A deliberate act to commit fraud relates more to intentional deceit against the insurer, while a natural disaster affecting several insureds pertains to catastrophic events, and errors made during claims processing do not capture the behavioral aspect associated with the term moral hazard.