Certified Financial Consultant (CFC) Practice Exam

Which term describes the risk associated with a policyholder's behavior that affects the likelihood of a loss?

1. Morale hazard

2. Moral hazard

3. Pure risk

4. Speculative risk

The correct answer is: Moral hazard

The term that accurately describes the risk related to a policyholder's behavior influencing the likelihood of a loss is "moral hazard." This concept arises when a person's behavior changes as a result of having insurance coverage, leading them to take on greater risks than they would otherwise. For instance, if a person knows that they have comprehensive car insurance, they might be less careful when driving, thus increasing the chance of an accident. Moral hazard highlights how insurance can create a disconnect between the insured and the risk they are taking on, potentially resulting in an increased frequency of claims. This understanding is critical in fields such as risk management and insurance underwriting, where assessing and mitigating moral hazard is crucial for maintaining the sustainability of insurance products. Other terms mentioned in the question relate to different aspects of risk. Morale hazard, while similar in name, primarily refers to the careless attitude that may develop when someone is insured, but is not specifically about the actions that increase the probability of a loss. Pure risk involves situations where there are only the possibilities of loss or no loss, without the chance for a gain, while speculative risk refers to scenarios that offer both the possibility of gain and the potential for loss. These distinctions reinforce the validity of "moral hazard" as