What does "moral hazard" refer to in the context of insurance?

In the context of insurance, "moral hazard" specifically refers to the tendency for individuals who are insured to take greater risks than they would if they were not insured. This phenomenon occurs because the insured party may feel a sense of security that the financial consequences of their actions will be covered by the insurance policy. For example, someone with comprehensive car insurance may drive more recklessly, knowing that any damage would be compensated by their insurer. This behavior can lead to an increase in the likelihood of claims, ultimately impacting the insurance system as a whole.

The other answers do not accurately capture the essence of moral hazard. Negligence leading to a claim is related to the actions of the insured, but it does not encompass the broader tendency to assume risk due to being insured. The notion that insurance must cover all damages reflects contractual obligations rather than behavior. Lastly, actions taken by insurers to mitigate risks relate to risk management strategies, which address how insurance companies deal with potential losses rather than how insured individuals respond to their coverage.