Illinois Insurance State Exam 2025 – 400 Free Practice Questions to Pass the Exam

Moral hazard refers to the increased likelihood of loss due to the behavior of the insured, particularly when they are covered by insurance. This phenomenon occurs because the insured may engage in riskier behavior or take less care in avoiding loss once they know they are financially protected by their insurance policy. For instance, a person with home insurance might neglect to lock their doors or maintain their property because they know any theft or damage would be covered by their insurance.

This concept is crucial in understanding how insurance companies assess risk. Underwriters take moral hazard into consideration when determining policy terms and premiums since higher moral hazard can lead to increased claims, thereby affecting the insurer’s overall financial stability. Recognizing moral hazard helps insurers implement measures to mitigate potential losses, such as requiring deductibles or implementing loss prevention incentives.

The other options address various aspects of risk but do not accurately encapsulate the essence of moral hazard. The risk of natural disasters focuses on environmental factors rather than human behavior, while fraudulent claims pertain to dishonest actions rather than the inherent risk associated with policy coverage. Lastly, unforeseen liabilities deal with unexpected obligations during coverage but also do not relate directly to the behavior of the insured concerning their risk management.