Virtually, all businesses are one way or another affected by the growing morality standards of the world’s varying cultures. These however have created questions over what one individual, group of people or society believes is right and what others believe is wrong; the variations in answers to this question are problems in the way of business owners and businesses across the world. Therefore, the discussion of moral hazards impact on insurance policies is another angle from which you can better understand how the moral consciousness of a particular culture has been a bottleneck to the complete successes of businesses.
A moral hazard is a situation where someone has limited responsibility for the risks they take. Consequently, that person or organization may have an incentive to take on more risks than they otherwise would because they don’t need to pay for them.
Hence, the primary assumption behind a moral hazard is that an individual in a transaction takes on unnecessary risks that affect the other party in the transaction. Moral hazard divides into ex ante and ex post moral hazard, the former being concerned with changes in the probability of the event, and the latter with changes in the cost of the event conditional on the event occurring.
Moral Hazards Impact On Insurance Policies
The moral hazards impact on insurance policies are that the insurance industry will find means to survive even if it has to be at the expense of their integrity given the fact that insurers will not stop to cause more of the said hazards. Here are the list of the moral hazards impact as promised you in this article:
1. Insurers Carelessness
People with insurance tend to be less careful because they have insurance. This causes the insurance company to pay more in claims, and eventually higher premiums will be necessary. The moral hazard problem in insurance will lead to higher premiums because those who are covered will be less careful with whatever behavior is being covered and behave in a way that is more risky. Both raise the cost of providing insurance for the provider. Although the question does not ask for an example, here is one: The problem will lead to higher health insurance premiums because those who are covered will be less careful about maintaining their health and seek medical care more frequently. Both raise the cost of providing health insurance.
2. Cost Incurrence
People who need insurance tend to buy insurance. This causes the insurance company to pay more in claims, and eventually higher premiums will be necessary. When insured individuals bear a smaller share of their medical care costs, they are likely to consume more care.
3. Product Value Reduction
Insurance companies screen potential buyers to offset any moral hazard. This causes the insurance company to pay less in claims, and eventually premiums will fall. The challenge for economists is to estimate whether someone who spends more in generous plans does so because the plan covers more or because such a plan attracts individuals with greater underlying health needs. Therefore the insurance company decides to cut down down on what and what insurance plans cover.
4. Professional Dishonesty
With moral hazard, Insurance companies begin to make laws or regulations that force them to cover risks that they would otherwise not cover, such as including coverage for alcoholism in health insurance. It increases the possibility of a loss that results from the insured worrying less about losses. Therefore, they take fewer precautions and may engage in riskier activities — because they have insurance.
5. Increase in Risks
Risk, peril, and hazard are terms used to indicate the possibility of loss, and are often used interchangeably, but the insurance industry distinguishes these terms. A risk is simply the possibility of a loss, but a peril is a cause of loss. A hazard is a condition that increases the possibility of loss. For instance, fire is a peril because it causes losses, while a fireplace is a hazard because it increases the probability of loss from fire. Some things can be both a peril and a hazard. Smoking, for instance, causes cancer and other health ailments, while also increasing the probability of such ailments.
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