InsuranceFinancial Glossary
Moral Hazard
Definition
The tendency of insured individuals to take greater risks because they know insurance will cover the losses. In health insurance, moral hazard can manifest as unnecessary hospitalization, choosing the most expensive room, or undergoing treatments that may not be medically essential.
Why It Matters
Moral hazard is why insurers impose co-payments, deductibles, and sub-limits — to give policyholders 'skin in the game.' Understanding this concept helps you see why some policy restrictions exist and why completely free-for-all insurance would be unsustainably expensive for everyone.