Erschienen in Ausgabe 10-2017Märkte & Vertrieb

288. Physical and moral hazard


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288. Physical and moral hazard

Within the context of property insurance a hazard is something which increases the risk of a peril occurring, and hazards can be of a physical or human (moral) nature.
A fire is more likely to break out in a building with old electric wiring than in one whose wiring is new, and this is an example of a physical hazard. Not only can a physical hazard increase the probability of loss as in the above example, it can also increase its severity. For example, the fire in Grenfell Tower, the block of flats that burnt down in London in June 2017, was triggered off by a fridge-freezer that caught fire. However, what made the fire develop into a conflagration that destroyed the building was flammable cladding.
Moral hazard is the observed tendency that those who know they are insured may have a more relaxed attitude to risk than those who are uninsured. For example, to reduce the risk of fire and explosion in an industrial process, it is important to make sure that any dust is cleared up frequently, but to save expense the management may do this less often, knowing full well that in the event of a fire the property insurer will pay. Although moral hazard is not the same as fraudulent intent, the distinction is finer than is sometimes realized. If a policy wording obliges the policyholder to take reasonable precautions to protect the property from damage, as it almost certainly will, and the policyholder knowingly fails to do this, at the very least this behaviour meets the definition of gross negligence (recklessness): the risk was recognized, but considered to be negligible. If the management did not even care whether or not damage occurred, this would be equivalent to contingent intention (bedingter Vorsatz), and ethically we are not far away from fraud.
Other lines of business, such as income protection (Berufsunfähigkeitsversicherung) are also subject to moral hazard. Consider, for example, a policyholder who begins to take up mountaineering, something he would never do without the cover. And some motorists with comprehensive policies may drive less carefully than if they had only third party liability cover.
Not only policyholders, but also third parties can be a source of moral hazard, and health insurance is a case in point. Given a choice, doctors who know that their patients are privately insured are more likely to opt for more expensive forms of treatment.