Meaning and General Causes of Moral Hazard

Meaning and The General Causes of Moral Hazard

The ordinary meaning of a moral is concerned with the principle of right and wrong conduct and character, teaching or upholding standards of good behaviour, conforming to the rules of right conduct, ethics, principles and model of life, behaviour as to right or wrong.

Therefore moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.

It relates to bad behaviour or conduct of the insured in relation to the subject matter of the insurance or arising therefrom.

Also, Moral Hazard may likely be seen as the increase in the probability of loss that results from dishonest tendencies in the character of the insured person.

What is a moral hazard?

Dated between [1963] and Pauly [1968], economists have blasted on two partial solutions to the problem of moral hazard: (i) incomplete coverage against loss and (ii) “observation” by the insurer of the care taken to prevent loss.

Moral hazard has been a condition that causes people to be less careful than they ought to be cannot be quantified as large or small. It is difficult to measure moral hazard compare to physical hazard.

However, an insurer can gain some insight on the moral hazard posed by the insured as to his carefulness, honesty and general integrity during the interview with him or manner of completion of the proposal form or by surveyors when visiting the insured premises.

Causes of Moral Hazard

A moral hazard occurs in the insurance industry when the insured party assumes additional risks knowing they’ll be compensated by their insurance company. Consider an individual with homeowners’ and fire insurance who smokes in bed.

The causes of moral hazard are.

a Fraud and corruption

b. carelessness

c. unreasonableness

d, Trends of event.

Fraud and corruption:

This is one of the major causes of moral hazard and is the worst form of moral hazard as well, for example, it may include the deliberate staging of loss, which never took place and inflating the amount claimed in respect of genuine losses.

Also, fraud is the action or instance of deceiving any person deliberately with a view of acquiring money or value or goods illegally or in a wrong way. Corruption as well means using one’s power in other to obtain the unmerited reward.

So to decline the proposed risk is the best underwriting the underwriter has to measure where the case of fraud or corruption exists.


Carelessness is another cause of moral hazard in insurance transactions.

It may be unsatisfactory as fraud. Careless means the act of showing zero attention or thought about something say the subject matter of insurance and it is being negligent, doing the avoidable acts which can result in loss or damage.

A declinature unlike in fraud may have to be adopted when there is a case of carelessness in an insurance contract or transaction.


Unreasonableness is another factor that causes moral hazards in the insurance business.

It means an attitude of expecting much from another person: it is a character of not being fair to others, expecting more than legitimate entitlements, the underwriter may not discover this bad moral hazard in the insured until there is a claim to be settled.

A supposed hones policyholder is unreasonable when at the time of claim could only accept his own information of the terms and conditions of the contract or raises unnecessary sentiments and over-demanding on the insurer.

However, when insureds attitudes go beyond reasonableness, this must be regarded as a bad moral hazard, which will probably mean refusal to offer renewal terms or even policy cancellation in extreme cases.

The trend of event:

The trend of events is also one of the causes of moral hazard in the contract of insurance. It implies the behaviour of the general.

Some areas of the world for instance have witnessed worse records of petty crimes than others, all due to the general condition in their society like Nigeria.

We have observed and recorded incidents of riots, vandalism and willful destruction of property owing to the attitudes of the society.

So by implication, it is rather dynamic varying from place to place, time to time, culture to culture, class to class and nation to nation. The general state of the economy does influence the rate of burglaries; fire outbreaks and crime.

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