Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What is a moral hazard?

1. Objective risk factors of a property

2. Subjective characteristics of the applicant that could cause a peril

3. External environmental factors impacting risk

4. Physical damages to insured property

The correct answer is: Subjective characteristics of the applicant that could cause a peril

A moral hazard refers to the subjective characteristics and behaviors of an individual that could increase the likelihood of a peril occurring, often because the individual may feel less incentivized to avoid risk when insured. This concept centers around the notion that individuals might engage in riskier behavior when they know they are protected by insurance. In this context, it is essential to understand that moral hazard is linked to behavior and intention rather than objective characteristics or external factors. It illustrates how the presence of insurance can alter an individual's decision-making, leading to potential increased risk exposure. This is distinct from aspects like physical damage to insured property or environmental influences, which do not relate to the moral choices or behaviors of the insured party. Thus, the focus on subjective characteristics underscores the psychological and behavioral factors that influence risk in the insurance realm.