Define "moral hazard" in the context of insurance.

Moral hazard refers specifically to the behavioral change that can occur when an individual becomes insured. Once a person has insurance coverage, they may take on greater risks or become less cautious, knowing they have financial protection if a loss occurs. This shift in behavior is what constitutes moral hazard; the insured party's attitude and actions might lead to a higher likelihood of a claim being made.

In the world of insurance, this can manifest in various ways, such as someone being less careful about locking their car or maintaining a property after acquiring insurance, as they feel less responsible for any potential losses. Understanding moral hazard is crucial for insurers as they assess risk and set premiums, ensuring they account for potential behavioral changes that might increase the likelihood of a claim. This concept is a key part of risk management within the insurance industry.