Moral hazard is a term that has to do with the actions and character of an individual and how those attributes may impact that the ability of a person to secure insurance protection. It covers different types of accidents, health issues, and other relevant types of coverage. Essentially, the moral hazard is the degree of risk that the insurance company is taking in order to provide coverage on the individual.

The concept of moral hazard begins with the application for insurance coverage. This is a good understanding that the individual will be completely forthcoming about any factors that could negatively influence the decision to accept the application. For instance, the individual is assumed to tell the truth about the personal habits like smoking, accurately report medical history, and provide timely data on any current health issues.

In this event, the insurance provider discovers that the applicant omitted information or deliberately falsified some portion of the application, the moral hazard is usually considered as great and the application is rejected. Even if the data is completely accurate, the management of the insurance provider must still weigh the possible consequences of insuring the individual under the current circumstances. If the moral hazard is considered to be within an acceptable range, the applicant is usually approved.