What is meant by morale hazard?

Morale hazard refers to a situation where an individual's indifferent or careless attitude towards risk can lead to potential losses. This concept highlights how a person's behavior, particularly a lack of concern for the consequences of their actions, can result in negligent behavior or a reduced effort to prevent losses. For example, someone who knows they are insured might not take adequate precautions to prevent theft or damage to their property, believing that their insurance will cover the loss if something happens. This attitude can increase the likelihood of a loss occurring, which is why morale hazard is a significant consideration in risk management and insurance underwriting.

In contrast, active attempts to cause a loss are associated with moral hazard, which involves intentional actions to create a loss situation. A cautious approach to risk management does not align with the indifferent behavior described in morale hazard, as it indicates a deliberate effort to mitigate risk. Lastly, a specific type of peril in insurance refers to the actual risks covered by an insurance policy, which is distinct from the behavioral aspects involved in morale hazard.