What is one possible outcome of moral hazard in the insurance industry?

One possible outcome of moral hazard in the insurance industry is that it can lead to increased premiums for policyholders. Moral hazard occurs when the behavior of the insured party changes as a result of having insurance coverage, typically because they feel more secure and may take on higher risks. For instance, a person who is fully insured may be less cautious and more likely to engage in risky behavior, knowing that they are covered against losses.

Insurance companies recognize this shift in behavior and the accompanying increase in risk. To mitigate potential losses due to moral hazard, insurers may raise premiums for policyholders to offset the higher likelihood of claims being made. This adjustment in premiums reflects the increased cost of covering the risk associated with individuals who are less incentivized to act prudently because they are insured. Consequently, the presence of moral hazard can create financial implications for both the insurer and the insured, highlighting the complex relationship between coverage and risk behavior in the insurance industry.