Insurance Broker Certification Practice Exam

What is the term for situations that increase the likelihood of loss due to dishonesty?

1. Physical hazards

2. Moral hazards

3. Legal hazards

4. Financial hazards

The correct answer is: Moral hazards

The term for situations that increase the likelihood of loss due to dishonesty is moral hazards. This concept specifically refers to instances where an individual's or entity's character or integrity raises the risk of loss. In an insurance context, moral hazards arise when a person may engage in dishonest or unethical behavior because they know they are insured. For example, if someone knows that their property is covered by insurance, they might be more inclined to commit fraud or to neglect proper care, assuming that any resulting loss will be compensated by the insurer. Understanding moral hazards is crucial for insurance professionals because they affect underwriting decisions and risk assessment. The presence of a moral hazard can lead to higher premiums or even denial of coverage as insurers seek to mitigate the risks associated with potentially dishonest behavior. Recognizing this type of hazard allows brokers and agents to better manage their clients' policies and avoid situations that could lead to increased claims or losses based on dishonesty.