moral hazard

noun

plural moral hazards

: a situation in which a party is incentivized to risk causing harm because another party is obligated to remedy the consequences of the harm caused

Patricia A. McCoy, a professor at Boston College of Law, said that during the financial crisis of 2008, the cap on deposit insurance was lifted under the Transaction Account Guarantee Program for most banks, and the suspension remained in place until the end of 2010. … Ms. McCoy said regulators and lawmakers need to be careful about permanently raising or eliminating the deposit cap as it can encourage unnecessary risk taking. "Every time this happens it increases the potential for moral hazard going forward," Ms. McCoy said.

—Matthew Goldstein

specifically : the possibility of loss to an insurance company arising from the character or circumstances of the insured

Examples of moral hazard in a Sentence

Recent Examples on the Web

Aside from the moral hazard involved, these benefits are not meant to be for voluntarily walking off the job. —Staff Report, Hartford Courant, 6 Apr. 2024

The government gave a huge boost to coastal development in 1968 by introducing the National Flood Insurance Program—an exemplar of moral hazard that allowed homeowners to rebuild over and over in risky areas while keeping their premiums artificially low. —Jen Schwartz, Scientific American, 1 Aug. 2018

These are two independent points, the scientific phenomenon of accessible DNA testing and the moral hazard of hiding a person from her family. —Carolyn Hax, Washington Post, 28 Jan. 2024

Why did the government apparently throw out concerns about moral hazard when SVB failed? —Cassandra Jones Havard, Fortune, 21 Mar. 2023

Word History

First Known Use

1861, in the meaning defined above

Legal Definition

moral hazard

noun

1

: the possibility of loss to an insurance company (as by arson) arising from the character or circumstances of the insured

deductibles decrease moral hazard

2

: the likelihood of investors to take greater risks because of the knowledge that losses incurred as a result of those risks will be covered by another (as a government)