Insurance Broker Certification Practice Exam

What term refers to the tendencies towards increased risk due to the character and reputation of the proposed insured?

1. Moral hazard

2. Morale hazard

3. Perils

4. Loss

The correct answer is: Moral hazard

The term that refers to tendencies towards increased risk due to the character and reputation of the proposed insured is moral hazard. This concept is grounded in the understanding that individuals with questionable morals or a bad reputation may engage in behavior that increases the likelihood of loss or damage. For example, if an individual known for reckless behavior acquires insurance, their tendency to take unnecessary risks may lead to a higher probability of claims being made. This contrasts with morale hazard, which refers to the indifference or carelessness of the insured towards loss because they know they are covered by insurance, rather than character and reputation. Perils are the specific risks or causes of loss covered under an insurance policy, and loss generally refers to the actual financial impact of claims under that policy. Thus, the correct term in relation to character and reputation affecting risk is moral hazard.