What is defined as 'moral hazard' in insurance terms?

Moral hazard in insurance refers to the increased risk that arises when the behavior of the insured party changes as a result of having insurance coverage. This change in behavior often leads to riskier actions because the insured may feel less incentivized to act carefully or responsibly, knowing that any potential losses will be covered by the insurer.

For example, a person who owns car insurance may be less careful about locking their car or avoiding risky driving situations, as they recognize that any resultant damages or losses will be compensated by their insurance policy. This behavior shifts the risk profile of the insured, leading insurers to account for moral hazard when underwriting policies and setting premium rates.

The other options do not capture the essence of moral hazard. While fraudulent claims pertain to deception in filing claims, they are not tied to behavior change post-insurance purchase. The depreciation of insured items refers to their decrease in value over time but does not relate to risk behavior. Neglect by others can affect the likelihood of claims but does not involve the insured changing their behavior as a result of having coverage. Thus, the concept of moral hazard is best represented by the increase in risk due to the insured's behavior.