Morale Hazard

From our previous discussion, i will like to complete the type of hazard that we have.

Morale Hazard

Morale hazard is the carelessness or indifference attitude to loss on the part of the insured, because of the existence of insurance.  The insured may have no deliberate intention to bring about a loss as is the case in the moral hazard, but he is simply  careless to prevent a loss.  His carelessness thereby increases the chance of loss.

For example, many people, who insured their vehicles, may decide not to show sufficient concern for the safety of their vehicles as a result of which they could park the vehicles carelessly anywhere without locking them.  This attitude would increase the chance of loss through theft.  On the other hand, as a sort of reaction to an unfriendly environment, a person may deliberately allow things to go bad. For example, a frustrated worker receiving very small salary may decide not to show sufficient care to ensure the safety of the machinery he is using at his place of work e.g. government drivers etc.  Morale hazard may be associated with employees and the society.

·         Employees

If the relationship between management and employees is poor, or if the worker’s salary is poor, employees may decide not to show much concern for the safety of their equipment.  And in some extreme cases they may damage their equipment.

·         Society

The general attitudes of the society may influence the level of risk and the incidence of claims.  For example, in the course of public demonstration, the demonstrators can destroy properties or set them ablaze.  The action of the demonstrators is not motivated by consideration of financial benefits, but simply to register their anger on the system.  Their action can therefore be classified as morale hazard.

Moral hazard is different from Morale hazard.  Moral hazard is motivated by selfish financial interest on the part of the insured.  It is a product of immoral behaviour.  Morale hazard is not motivated by any selfish immoral consideration.  It is just a careless or indifferent attitude of the insured to loss.

Uncertainty

A sense of uncertainty surrounds every human undertaking.  As students, we do not know whether we shall pass our examinations and get qualified, we do not know if we shall be lucky enough to secure the job that we desired, we do not know if our marriage would be successful.

If a businessman buys a new machinery, he cannot know whether the machine will produce the expected output, he will not know whether the employees will be prepared to work with the machine, he will not know whether he will be able to get the necessary spare parts for the machine, he will not know whether there will be market for the increased output of the business, he cannot know whether the employees will not go on strike, he cannot know whether thieves will steal his products, he cannot know whether the whole factory will burn down.  From the above, it will be seen that a businessman operates in an uncertain environment.

However, in a few cases, the businessman knows with certainty what will happen in future.  For example, he knows that if he increases the number of employees, the salary bill will rise.  Generally, businessman operates in an uncertain environment.

Moral Hazard

Moral hazard is concerned with the attitude and behavior of people. Moral hazard refers to deliberate human failing which increases the chance of loss. It is the dishonest instinct in the individual which may impel him to commit fraud or any illegal act. It is largely, the state of working of human mind. For example, a man who insures his vehicle may sell the same vehicle secretly and thereafter, lie to his insurers that the vehicle has been stolen in order to collect indemnity from the insurers. Also, a dishonest business man who insures his stock to another location and turn round to deliberately set the building ablaze in order to collect indemnity from his insurers. Technically, this amount to stealing from the insurer.

Moral hazard unlike physical hazard is very difficult to control since it is the product of the state of working of human mind which cannot be easily controlled.

Moral hazard exists in all branches of insurance and this factor is one of the considerations which insurers take into account when deciding whether or not to provide insurance cover and on the amount of premium to charge. Moral hazard has a general tendency of pushing up premium for both honest and dishonest insured.

An insured may consider it immoral to steal a neighbour’s property, but he may think differently when he decides to steal from an insurance company. Dishonest insured may affect their decisions to steal from their insurers by failing losses or inflating the amount of legitimate claims and justifies their actions on the grounds that the insurers are rich.

This is a completely wrong notion.

However, insurers have been attempting to control moral hazard through skillful underwriting practices and inclusion of certain provisions in the policy, such as excess, franchise, deductibles, exclusions etc.

The Nature of Moral Hazard

A moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first: the standard example is a worker with an incentive to shirk on the job. Financial examples include the following:

•  I might sell you a financial product (e.g., a mortgage) knowing that it is not in your interests to buy it.
•  I might pay myself excessive bonuses out of funds that I am managing on your behalf; or
• I might take risks that you then have to bear.

Moral hazards such as these are a pervasive and inevitable feature of the financial system and of the economy more generally. Dealing with them—by which I mean, keeping them under reasonable control—is one of the principal tasks of institutional design. In fact, it is no exaggeration to say that the fundamental institutional structure of the economy—the types of contracts we use, and the ways that firms and markets are organized—has developed to be the way it is in no small part in response to these pervasive moral hazards.

For more info on Moral Hazard click here : http://www.ft.com/cms/s/0/5ffd2606-69e8-11dc-a571-0000779fd2ac.html

Physical Hazard

Physical hazard is the condition of any property, which increases the chance of loss. For example, if you buy an old grass thatched wooden house, the wooden walls and the grass roofing are physical hazards that increase the chance of fire.

If the braking system in your car is defected and a result of this, you fail to bring, the vehicle to a halt, and collide with another car, the defective brake is a physical hazard while the collision is the peril or cause of loss.

Physical hazard can be controlled by eliminating those physical properties that can increase the chance of loss.

Examples of physical hazard can be: Fire , Explosion, Chemical Radioactivity

TYPES OF HAZARD

Let's talk about different types of Hazards.  There are different types of hazard. The 3 most important types are:

• ·         Physical Hazard
  ·         Moral hazard
  ·         Morale Hazard

The Definition

PERIL

Peril is the thing that causes loss. So peril is the cause of a loss. For example, if your book is stolen, then we say that the peril or cause of the loss of the book is theft. The peril here is the theft. If a severe draught brings about agricultural failure, then we can say that the peril or cause of scarcity of food is the draught. The peril here is the draught. If your house is destroyed by fire, then we say that the cause of the loss of the house is fire. If you car is destroyed in an accident, then we say that the cause of the loss of the car is accident.

HAZARD

Hazard is the condition that created or increases the chance of loss arising from a given peril. For example, storing petroleum in the kitchen is a hazard, which increases the chance of loss from the peril of premature death.

PERIL AND HAZARD

Peril is different from the term Hazard. Also, the two terms are different from the term risk. They are not the same things as risk. However, the terms peril and hazard are very often used interchangeably with each other and with risk.

PERIL AND HAZARD

Peril is different from the term Hazard. Also, the two terms are different from the term risk. They are not the same things as risk. However, the terms peril and hazard are very often used interchangeably with each other and with risk.