Which of the following practices of insurers deter moral hazard? Multi-choice of 4 possible answers listed below.
a. setting a uniform premium structure. b. requiring people to purchase the same coverage. c. arranging for reinsurance to cut the risk of unexpectedly large claims. d. conducting security checks without notice and terminating the policy whenever required.
When we buy insurance, we are then protected against the full cost of certain negative events that could happen to us. It is possible that this protection might make us less cautious. We might take more risks that would expose us to loss because of the fact that we can rely on the insurance company to cover our losses. This is the meaning of moral hazard.
Of the choices given above, D is the most likely to deter moral hazard. It is the only one that is likely to make the holder of an insurance policy less careless. Such checks, and the threat of the termination of the policy, are likely to deter the insured from taking risks. They know they can lose their protection at any time if they are taking excessive risks and therefore they will be more likely to refrain from taking those risks.