What does "moral hazard" refer to in the context of insurance?

Moral hazard refers to the risk of loss that arises from changes in the behavior of the insured party once they have obtained insurance coverage. When individuals or businesses are insulated from risk through insurance, they may take on riskier behavior or become less diligent in preventing losses. For instance, a person who has comprehensive home insurance may be less cautious about locking their doors or maintaining their property because they know they are covered in the event of theft or damage. This change in behavior after obtaining insurance is what constitutes moral hazard, as it can lead to an increase in the likelihood or extent of a claim.

The other options pertain to different aspects of risk and insurance but do not capture the essence of moral hazard. For example, external environmental factors, physical damage during transit, and the risk of natural disasters relate to tangible risks that can impact coverage but do not address the behavioral changes of the insured that can influence risk and loss scenarios. These concepts are important in insurance but are separate from the idea of moral hazard, which is fundamentally about the impact of insurance on insured behavior.