What must an insurer do if they suspect a moral hazard in an applicant?

When an insurer suspects a moral hazard in an applicant, the most appropriate course of action is to conduct a thorough investigation. A moral hazard refers to a situation where an individual might engage in risky behavior because they are protected from the consequences, particularly regarding insurance.

By investigating the situation thoroughly, the insurer can assess the applicant's history, behavior, and the circumstances surrounding the application. This allows the insurer to gather sufficient evidence to make an informed decision about whether to proceed with the application, impose certain exclusions, or possibly reject it.

Investigations can involve checking past insurance claims, evaluating the applicant's credit history, or looking into any previous actions that might indicate a propensity for risky behavior. Simply rejecting the application or taking other immediate actions without understanding the full context could lead to the loss of potentially valid applicants who might not actually present a high level of risk.

Thus, conducting a thorough investigation is crucial in maintaining responsible underwriting practices and ensuring that decisions are based on accurate information. This approach also aligns with the insurer's obligation to act in good faith and to ensure the integrity of the underwriting process.