Which of the following best describes moral hazard?

Moral hazard refers specifically to the situation where an individual's behavior may change as a result of having insurance coverage, leading to a potential increase in risk-taking or dishonest behavior. This concept is rooted in the understanding that after being insured, individuals might feel less incentivized to avoid loss because they believe the insurance company will cover the financial consequences. Dishonesty or a lack of integrity is a key characteristic of moral hazard, as it involves an individual taking advantage of the insurance policy inappropriately or neglecting preventive measures due to the safety net provided by the insurance.

In this context, the other choices do not accurately capture the essence of moral hazard. Physical risks pertain to the tangible dangers associated with loss, while a careless attitude relates more to negligence rather than the ethical implications of behavior influenced by insurance. Natural disasters are external factors that can lead to claims but do not represent the moral or ethical dimensions associated with an individual’s behavior after obtaining insurance. Hence, the focus on dishonesty and integrity aligns perfectly with the definition of moral hazard.