Insurance Broker Certification Practice Exam

An individual who is prone to dishonesty represents which type of risk?

1. Investment risk

2. Moral hazard

3. Physical hazard

4. Legal hazard

The correct answer is: Moral hazard

The presence of an individual who is prone to dishonesty exemplifies a moral hazard. This term refers to a situation where one party engages in risky behavior or actions that could be detrimental to another party because they believe they are shielded from the consequences. In the context of insurance, a person displaying dishonest tendencies may be more likely to manipulate or deceive in situations involving claims or policy details, increasing the risk for the insurer. Moral hazard is fundamentally about the integrity and behavior of individuals and how their actions can influence risk levels. It contrasts with other types of hazards that focus on physical conditions or legal issues. For instance, investment risk pertains more to the potential for loss within financial markets. Physical hazard involves tangible risks like hazardous locations or conditions, while legal hazard typically relates to the legal environment affecting the likelihood or severity of a loss. Thus, the individual’s propensity for dishonesty directly correlates to moral hazard, making it the accurate choice in this instance.