Question

How can moral hazard lead to more costly insurance premiums than one was expected?

Short answer

The ability and willingness of the policyholder to assume greater risk than their normal capacity, which causes the insurance business to charge high premiums for such a high-risk level, is the reason for charging higher rates in the moral hazard problem.

Step-by-step solution

Definition of moral hazard.

A moral hazard in economics is a scenario whereby an economic operator has had a reason to expand its exposure to risk since it does not bear the full price of that hazard.

Explanation of solution.

However, when consumers know they won't have to pay anything out of pocket, they are less likely to take safeguards for their health or the security of their company and are ready to take more risks than usual. When it comes to health insurance, for example, people take measures and follow all medical requirements when they don't have a policy and don't follow any medical rules when they do. Another example is that businesses use a high-security system when they don't have insurance and a low safety policy when they do.

Moral risks are a sort of behavior that people engage in for their own health or the health of their companies, and they are more expensive for insurance companies since they entail a higher risk likelihood.

As a result, the increased premium cost is related to the policyholder's high-risk level after purchasing the insurance.