Canadian Accredited Insurance Broker (CAIB) Two Practice Exam

Which of the following is a type of moral hazard?

1. Indifference to loss

2. Financial condition

3. Vandalism

4. Monitored alarm

The correct answer is: Financial condition

Moral hazard refers to the situation where a party is more likely to take risks because they do not have to bear the full consequences of their actions. This often arises when an individual or organization is insulated from risk, leading them to take less care in avoiding potential losses. In this context, the selection related to financial condition highlights how an individual’s economic circumstances can influence their risk behavior. When someone is in a precarious financial situation, they might be more willing to engage in risky behaviors, such as committing fraud or neglecting certain preventative measures, because they feel a sense of desperation or entitlement due to their financial struggles. This change in behavior, influenced by their financial condition, exemplifies moral hazard—where the potential for loss does not deter risky behavior because the consequences are perceived differently by the individual. Understanding moral hazard is vital for insurance brokers, as it impacts underwriting and claims processes. Insurers must assess not only the financial condition of a potential client but also the likelihood that this condition may lead them to act in ways that increase their risk level after securing insurance.