Other Than Life (OTL) Practice Exam 2025 – All-In-One Guide to Exam Success!

An increase in "moral hazard" typically refers to a situation where the behavior of the insured party changes in a way that increases the likelihood of a loss or the amount of a loss after an insurance policy has been purchased. This can occur because the insured party may take on greater risks or less care, knowing that they are covered by insurance.

In this context, when moral hazard increases, the insurer faces heightened risk. This results in a higher probability of claims being filed and potentially larger payouts when those claims occur. It reflects the idea that individuals or businesses may act less cautiously if they do not bear the full consequences of their actions, which the insurer must then account for in their risk assessments and financial forecasting. Understanding this concept is crucial for insurers, as it impacts their pricing, underwriting practices, and overall risk management strategies.