Moral hazard
Certified Financial Planner glossary · Certified Financial Planner
Definition
The change in an insured’s behavior induced by the existence of coverage.
Moral hazard in plain English
After buying full coverage, a client starts leaving the convertible unlocked "because insurance will handle it." Moral hazard is the change in an insured's behavior induced by the existence of coverage: intentional or opportunistic shifts once someone else bears the loss. Insurers fight it with deductibles, exclusions, and underwriting. Distinguish it from morale hazard, which is more about carelessness than calculated behavior change. Coverage that nudges someone into riskier choices is moral hazard by definition.
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