When might moral hazard occur in an insurance context?

Moral hazard occurs when individuals alter their behavior in a way that increases the likelihood of a loss because they have insurance coverage. In this context, when individuals feel less accountable for their safety, it can lead to riskier behavior, knowing that they are protected by insurance. This psychological shift often results from the perception that the financial impact of their actions is mitigated due to the insurance coverage.

For instance, a person might take fewer safety precautions or engage in riskier activities, such as driving recklessly, believing that their insurance will cover any potential accidents. This behavior illustrates moral hazard, as the safety net provided by insurance can inadvertently encourage individuals to act in ways that increase the chances of a loss occurring.

The other options do not directly exemplify moral hazard. While increasing premiums can motivate safer behavior to avoid higher costs, stricter policy terms or more complex claims processes typically relate to operational changes rather than directly influencing behavior related to risk-taking.