What does the term 'moral hazard' refer to in the context of insurance?

The term 'moral hazard' refers specifically to the changes in behavior exhibited by the insured after obtaining insurance coverage. This concept arises from the assumption that individuals may take on greater risks or behave less cautiously once they are shielded from the financial consequences of those risks due to their insurance policy.

For instance, someone with comprehensive car insurance might drive less carefully, knowing that any potential damages can be covered by the insurer. This behavioral shift can lead to higher risks and potential costs for insurance companies. Understanding moral hazard is crucial for insurers as it influences underwriting practices and the development of policy terms to mitigate such risks effectively.

In the provided context, the other options do not accurately encapsulate the definition of moral hazard. The increase in risk due to negligence does not specifically relate to behavior post-insurance acquisition. Similarly, a decrease in claims doesn't connect to the behavioral adjustments that occur once coverage is in place. Lastly, the idea that risk can be eliminated through proper management does not align with the concept of moral hazard, which emphasizes behavioral risk rather than outright risk elimination.