In which situation might an insurer suspect the presence of a moral hazard?

A situation where an insurer might suspect the presence of a moral hazard often involves a policyholder not being honest about their health on an application. Moral hazard refers to the idea that individuals may take greater risks or be less diligent in their behavior because they have insurance that protects them against the consequences of that behavior. When a policyholder misrepresents their health status, it indicates a potential willingness to deceive to obtain coverage or better terms, which can lead to higher risk for the insurer.

This dishonesty could lead to a higher likelihood of the policyholder filing claims, knowing that the insurance will cover them despite their undisclosed health issues. As a result, insurers are concerned about moral hazards because they can lead to increased claims and financial loss. In contrast, having multiple insurance policies may indicate smart management of risk rather than a moral hazard, while previous claims do not necessarily reflect unethical behavior. Similarly, not maintaining coverage could simply stem from financial difficulties rather than a moral hazard.