Canadian Accredited Insurance Broker (CAIB) One Practice Exam

When evaluating an applicant, which type of hazard refers to potential loss due to the applicant's character or attitude?

1. Morale hazard

2. Physical hazard

3. Moral hazard

4. Operational hazard

The correct answer is: Moral hazard

The correct choice pertains to moral hazard, which is defined in the context of insurance as a situation where an individual's character or attitude can lead to an increased likelihood of loss. This type of hazard reflects the behavior of the insured—specifically, the idea that if a person has insurance coverage, they might take on more risk or display less caution, knowing that they are protected from potential financial loss. For example, someone who is careless with property because they feel it is insured embodies this form of hazard. In assessing applicants for insurance, understanding moral hazards is crucial, as it helps underwriters gauge the risk posed by a potential policyholder based on their tendencies toward risk-taking behavior. This understanding can greatly influence the decision to provide coverage and at what cost. Physical hazards, on the other hand, relate to tangible conditions that increase the likelihood of a peril occurring, while operational hazards pertain to the risks associated with the internal processes of a business. Morale hazards are sometimes confused with moral hazards but are distinct in that they refer to an individual's indifference or lack of concern regarding loss since they believe they are covered by insurance.