What do moral hazards refer to in life insurance?

Moral hazards in life insurance pertain to the concept of policyholders engaging in riskier behaviors because they are protected by their insurance coverage. This means that once individuals have secured a life insurance policy, they may act in ways that increase the likelihood of a claim being made, as they do not bear the full consequences of their actions. For example, someone who knows they have a life insurance policy might make decisions that they would otherwise avoid if they were fully responsible for the outcomes of their actions.

The essence of moral hazard arises from the shift in behavior when individuals feel insulated from risk, leading to a higher incidence of claims. This aspect is crucial for insurers to consider when underwriting policies and setting premiums, as it can directly affect the overall risk profile of their insured population. Understanding moral hazards is essential for maintaining the sustainability of the insurance system.