What is meant by morale hazard?

Morale hazard refers to a situation where an individual's careless attitude or indifference toward their own circumstances leads to an increased risk of loss or damage. This psychological aspect of risk management suggests that when people feel less responsible for their assets or risks—often because they are insured or believe they face no consequences—they may not take the necessary precautions to protect against potential losses.

In the context of insurance, if a policyholder exhibits a careless attitude due to the knowledge that they are covered, they may not take actions they otherwise would to mitigate risks. For instance, someone might leave their property unsecured or neglect safety measures under the belief that insurance will cover any resulting losses. This can lead to higher incidence of claims, ultimately affecting insurance rates and the viability of the insurance model itself.

The other options are either not representative of the intrinsic meaning of morale hazard or describe concepts that do not align with the idea of a careless or indifferent approach to risk.