Which statement correctly distinguishes moral from physical hazards?

Which statement correctly distinguishes moral from physical hazards?

• A. Moral hazard concerns dishonesty or carelessness; physical hazard concerns tangible risk factors.
• B. Moral hazard refers to physical risk; physical hazard to ethics.
• C. Both addressed only by premium changes.
• D. Moral hazard is about weather, physical hazard about geography.

Answer: (A)

Distinguishing moral hazard from physical hazard hinges on the source of the increased risk: behavior versus environment. Moral hazard refers to changes in an insured person’s behavior—dishonesty or carelessness—that raise the probability or size of a loss once insurance is in place. Physical hazard, by contrast, involves tangible conditions in the risk environment that make a loss more likely, such as icy roads, faulty wiring, or poor maintenance. The statement captures this difference by saying moral hazard concerns dishonesty or carelessness and physical hazard concerns tangible risk factors. For example, if a homeowner neglects maintenance because they have insurance, that’s moral hazard; if a house has faulty wiring that could cause a fire, that’s a physical hazard. Other options either mix up the concepts or focus on unrelated ideas like premiums, weather, or geography.

Distinguishing moral hazard from physical hazard hinges on the source of the increased risk: behavior versus environment. Moral hazard refers to changes in an insured person’s behavior—dishonesty or carelessness—that raise the probability or size of a loss once insurance is in place. Physical hazard, by contrast, involves tangible conditions in the risk environment that make a loss more likely, such as icy roads, faulty wiring, or poor maintenance. The statement captures this difference by saying moral hazard concerns dishonesty or carelessness and physical hazard concerns tangible risk factors. For example, if a homeowner neglects maintenance because they have insurance, that’s moral hazard; if a house has faulty wiring that could cause a fire, that’s a physical hazard. Other options either mix up the concepts or focus on unrelated ideas like premiums, weather, or geography.