Moral Hazard

Date:  2021-03-12 22:56:03
2 pages  (591 words)
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This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
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This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

The article states that moral hazard is a term used to describe the behavior changes that occur when people are insured against all loses. According to the article, insurance refers to that something that protects a person from any harm. It does not have to bear the common meaning of the policies bought from insurance agents or companies. It is common for people to adopt different behavior changes when they know that they are fully protected from any impending risks or damages incurred. As per the article, human beings will be more careless to causing damages to their properties especially when they know that they are covered. Therefore, should they cause any damage; they will not have to use money from their pocket to rectify such damages. Similarly, fully insured people are more likely to engage in risky behaviors because they know that they stand to lose nothing. After all the insurance cover will take care of every risk incurred. This is also true that fully insured people will be careless in taking caution not to cause more harm and dangers.

Going by the examples given in the article, car owners who are fully insured will always be less cautious in causing damages to other cars because they will not be liable for any costs. These bad behaviors might even extend to the frequency of accidents especially to those who have the third party complete insurance covers. They will frequently take such risks knowing that they will not be answerable for any damaged or risk caused. After all, they are fully covered, and the companies will take care of the problems incurred. Banks on the same note will take part in risky investment knowing well that even if the investment fails, the government will bail them out of the mucky situation. This is common behavior that happens among human beings. People are prone to acts of negligence and risky behavior when they know that they will not hold any liabilities to their actions.

It is important therefore for firms to ensure that people are responsible for their actions. Insurance companies should come up with strict policies that award responsibilities to people due to their misbehavior. As per the article, it is important for firms to insure partially people and their properties. They should ensure that the insured have a bigger role to play in dealing with their risks or damages caused. It is right for such firms to make people pay high prices for such occurrences. They should deny them full cover to ensure that such people control their behavior. Similarly, the firms should ensure that people are entitled to deductibles so that they take responsibilities for their actions. Banks take responsibilities in investing clients' money. The financial institutions may involve in risky investment plans knowing that even if the plans are risky, they will get help from the government. They engage in such activities because they know that the government will come to their rescue should such actions fails. Therefore, to instill the need for moral hazard awareness, insurance companies should ensure that people take responsibilities for their behavior. The government should also ensure that banks play a role in recovering their lost investments. Ensuring full responsibilities will help in inculcating the right behavior in people and financial institutions. Similarly, health insurance companies should ensure that they do not take too many medical risks to enable people to be responsible for their actions. The act will reduce the amounts of expenditures for insurance companies and to the government sectors.

 

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