Definition of Moral Hazard as mentioned in Wikipedia is "Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk."This definition is self explanatory; further clarification can be added using following examples.
Burglary Insurance:-- Taken a burglary insurance , insurer keeps more costly products at home moreover he might not invest more in securing his house( use of inexpensive locks) . Or become careless ( ignore to recheck if house is lock properly in doubt).
Health Insurance:-- Just say an itch with an Insurance is a severe allergy.
Actuaries while pricing product needs to take care of Moral Hazard as an important phenomenon. While pricing the product he has to keep in mind the effects of various change in policy conditions might have on Moral Hazard. For example:-- pricing a Health insurance policy which was earlier has an deductable but was withdrawn later might have much more effect in claims because of triggering of Moral Hazard claims. Underwriters and Actuaries work together in such cases to price these effects as effectively as possible.
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