Which of the following best describes "moral hazard" in insurance?

Moral hazard refers to the phenomenon where having insurance may lead individuals or organizations to take greater risks than they otherwise would, because they do not bear the full consequences of those risks. In this context, when insured parties are protected against losses, they might engage in behavior that increases the level of risk.

This behavior can manifest in various ways, such as neglecting safety measures or engaging in reckless activities, under the assumption that their insurance will cover any resulting damages or losses. Thus, B accurately captures the essence of moral hazard by indicating that the risk is heightened due to the insured parties' engagement in risky behavior, which stems from a reduced personal stake in the consequences.

The other options reflect different aspects of risk management but do not specifically relate to the concept of moral hazard. For instance, a decrease in risk due to preventive measures describes the opposite of what moral hazard entails. Similarly, risks associated with natural disasters and the likelihood of fraud in claims are related to insurance but do not encapsulate the core idea of moral hazard, which focuses more on the behavioral response of the insured after obtaining coverage.