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WHAT IS MORAL HAZARD
1) It is a very common phenomenon in the cases of insurance. This can be seen when there is any type of insurance. It could be health insurance or for any priced things of yours. This tells us that the behavior of humans can change the way they look at something when they are insured for it.
2) If they are not under the cover of insurance they tend to behave in a different way. This is a risk that the insurance company has to face due to the behavior of the consumers. It could be the other way round too.
3) If they are not under the cover of insurance they tend to behave in a different way. This is a risk that the insurance company has to face due to the behavior of the consumers. It could be the other way round too.
Let us consider the simple example where you have your bike insured. In case you are not insured, you take extra care to avoid theft or any damage occurring to it. If there is damage or loss of the bike you will have to face the loss due to it. But the way you behave changes entirely if your bike has full coverage through the insurance that you have secured for it. Due to this, even the loss of the bike would not affect you.
The chances of you losing your bike would be around 10 percent with all the care you take not to lose it. On this basis, the insurance company would charge around a hundred pounds from you.
But in case you are insured, the chances of losing it would be increased to 30 percent. But the insurance company would have charged you the same hundred pounds based on the original rate of chances to lose the bike, which was on ten percent only. But if this is done, the insurance company would be the one to lose out. This is the moral hazard that is faced in this case.
Overcoming the issue
There are ways to overcome this to a certain extent though it cannot be completely removed. This can be done by the way of incentives. The issue of moral hazard is why they do not give you complete insurance.
The other thing that these companies do is that they make the process of getting the money a difficult one. This way you would be more reluctant to make a claim. This would be one way to make you realize that you need to be more careful to safeguard the bike that you have.
If the government is finding ways to help the reckless lending decisions, then it would make more of the consumers to go for the reckless loans in the future for these things.