Which scenario demonstrates the concept of moral hazard in insurance?

The scenario that best illustrates the concept of moral hazard in insurance is the deliberate neglect of property. Moral hazard refers to the situation where the behavior of an insured individual changes as a result of having insurance coverage. In the case of deliberate neglect, the insured may feel less motivated to take proper care of their property because they believe that if something goes wrong, the insurance will cover their losses. This change in behavior can increase the likelihood of a claim being made, as the individual assumes less personal responsibility for their possessions.

Moral hazard typically arises when one party takes risks because they do not bear the full consequences of their actions. In this scenario, neglecting property can lead to an increase in claims, which is counterproductive to the purpose of insurance. By understanding that insurance can influence behavior, insurers must consider how moral hazard might affect their underwriting and risk assessment processes.