Moral Hazard

Moral Hazard is an economics jargon term that commonly gets thrown around in political and financial talk. Learn what it is, what it means, how insurance companies combat it, and the role it plays in seeding a financial crisis.

When a company knows that their back will be covered, what will prevent them from taking risks? Companies that are protected from risk will violate the system due to moral hazard. Large companies should be allowed to fail, even if it hurts the economy.

During the latest recession, the concept of "moral hazard" was pitted against "too big to fail". Both are true - there is moral hazard is rescuing firms that are too big to fail. So, how can the predicament be avoided in the first place?

Section 12 of The Actuary's Free Study Guide for Exam 5 discusses the concepts of moral hazard and morale hazard as they pertain to insurance and offers five practice questions and solutions.

Moral hazard is a well-known factor in determining financial risk. So why does it seem that the Feds decided tp ignore it?

The concept of Moral Hazard is very familiar to insurance professionals, underwriters whose business it is to evaluate all kinds of hazards but to steer clear of those beyond predictability.