Origin of the Term 'Moral Hazard' in Insurance
The term 'moral hazard' originated in the 19th-century insurance industry to describe a key problem: once a party is insured, their incentive to take precautions against a loss is reduced because they no longer bear the full cost of that loss. This behavioral shift, a form of hidden action, increases the risk for the insurer. For example, a merchant whose cargo is fully insured might be less inclined to pay for a more experienced ship captain or a safer, but slower, shipping route.
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The Economy 2.0 Microeconomics @ CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
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