CAS Practice Exam 2025 – Complete Study Guide

The correct answer highlights how moral and morale hazards are directly associated with the behavior of insured parties regarding their willingness to commit fraud.

Moral hazard refers to the situation where individuals alter their behavior when they are insulated from risk, often leading to less cautious behavior because they do not bear the full consequences of their actions. For instance, in the context of crime risks, if an insured party knows that their insurance will cover certain types of losses, they may be more inclined to file a claim that is exaggerated or even fraudulent. This increase in willingness to file dishonest claims can directly impact the financial stability of an insurance pool and increase overall crime risks related to fraud.

Morale hazard, on the other hand, arises from indifference to loss because of the existence of insurance. This can similarly lead insured individuals to take more risks or to not safeguard their property as much, thus increasing the chances of theft or other crimes, which they may then attempt to claim under their insurance.

Understanding these hazards helps insurers to design policies and implement measures that mitigate the potential for fraud and manage the associated risks more effectively.