Life & Health Insurance Exam (National Portion)Underwriting and Policy IssueHard
An applicant for a health insurance policy is considered a 'moral hazard' by the underwriter. Which of the following scenarios best exemplifies a moral hazard in the context of underwriting?
- AThe applicant works in a dangerous occupation, such as a deep-sea diver.
- BThe applicant recently moved to an area with a high crime rate.
- CThe applicant has a history of submitting fraudulent insurance claims.
- DThe applicant has a family history of heart disease.
Show answer & explanationAnswer & explanation
Correct answer: C. The applicant has a history of submitting fraudulent insurance claims.
Moral hazard refers to an increased likelihood of loss due to an applicant's dishonest tendencies or character. A history of submitting fraudulent claims directly indicates such a tendency, making it a clear example of a moral hazard.
Why the other options are wrong
- A. A dangerous occupation is a physical hazard, as it increases the chance of injury or death.
- B. Moving to a high-crime area is a locational hazard, influencing the risk of property loss or personal injury, but not necessarily a moral hazard.
- D. Family history is a physical hazard, indicating a predisposition to health issues.
Moral Hazard
A condition that increases the probability of loss due to an individual's dishonest tendencies or character, often involving deliberate actions to cause or inflate a loss.
- Relates to applicant's character/tendencies
- Increases likelihood of deliberate loss
- Examples: fraudulent claims, reckless behavior
Memory trick: Hazards: P.M.M.L. - Physical, Moral, Morale, Legal.