How can insurance companies mitigate moral hazard?

Insurance companies can mitigate moral hazard by providing discounts for safe behavior because this approach incentivizes policyholders to engage in less risky activities. Moral hazard refers to the tendency of individuals to take on higher risks when they know they are protected by insurance. By offering discounts, insurers encourage behaviors that reduce the likelihood of claims, such as safe driving or maintaining a healthy lifestyle. This strategy not only helps in decreasing potential claims but also fosters a culture of responsibility among insured individuals.

The other options do not effectively address moral hazard. Lowering deductibles can sometimes lead to increased claims as individuals may be less incentivized to avoid risks when the out-of-pocket costs are reduced. Offering unlimited coverage does not inherently address risky behavior; instead, it can potentially encourage over-utilization of services. Lastly, removing age limitations from policies does not directly influence an individual's behavior, and it may expose insurers to greater risk without resolving the moral hazard issue.