What is the meaning of morale hazard?

Morale hazard refers to a situation where the behavior of an insured individual changes due to the presence of insurance, leading to increased risk. When people have insurance coverage, they may feel less vigilant or careful because they know they are financially protected in case of a loss. This mindset can lead to carelessness, as individuals might take unnecessary risks or neglect safety measures since they believe their insurance will cover any potential losses or damages.

For instance, a person with comprehensive car insurance may be less cautious while driving, believing that any accident will be covered. This shift in attitude is what constitutes a morale hazard; it is not about intentional wrongdoing but rather an unintentional increase in risk behaviors that arise from the comfort and security provided by insurance. The other options presented do not accurately capture this phenomenon, as they pertain to different aspects of risk or insurance behavior.