Moral Hazard vs. Morale Hazard: An Overview

Moral hazard and morale hazard are very similar-sounding terms, and while they are even close in meaning, the subtle difference between them is an important one. While both terms describe a change in behavior related to risk, one implies certain malice, while the other depicts a more benign evolution.

Key Takeaways

  • Moral hazard refers to behavioral changes that might occur and increase the risk of loss when a person knows that insurance will provide coverage.
  • When a person can avoid the potential consequences of a risk, their actions, and attitude change and there is a greater likelihood of a moral hazard.
  • Morale hazard describes the same kind of behavioral change that might occur when a person knows insurance will cover them, but in this case, it's subconscious.
  • The critical difference between moral hazard and morale hazard is conscious vs. subconscious, which speaks to the intent of the covered party. 

Moral Hazard

Moral hazard describes the behavioral changes that might increase the risk of loss taken because the actor will not bear responsibility should things go wrong. Insurance industry people use to term to refer to the possibility that after receiving coverage, a person might act in a risky way for personal gain because the insurance company will have to cover all losses. Moral hazard is the idea that insurance promotes risk-taking for personal gain.

Moral hazard describes a conscious change in behavior to try to benefit from an event that occurs. Conversely, morale hazard describes an unconscious change in a person's behavior when he is insured.

Morale Hazard

Morale hazard is an insurance term used to describe an insured person's attitude about his or her belongings. It represents the rise of indifference to loss because the items are covered. For example, suppose a person pays insurance for his new phone.

Morale hazard arises when the model of his phone becomes outdated, and he no longer cares about it. He is indifferent to his phone getting damaged because his insurance would allow him to get a new one. His indifferent attitude toward his phone leads to unconsciously changed behavior.

The critical difference between moral hazard and morale hazard is the intent. Moral hazard described the intentional seeking of risk for personal gain because you do not bear the cost of failure. Morale hazard describes indifference to unintentional risk.

Moral Hazard Example

One type of moral hazard is ex-ante. Ex-ante hazard defines the behavioral change of a policyholder before an event occurs. For example, suppose Milton, a professional cliff diver, does not have health insurance. He goes through his career without doing the dangerous dives that could send him to the hospital. Milton knows should he get hurt and need to go to the hospital, he will have to pay the medical bills out-of-pocket. Milton decides to get health insurance, and once his insurance policy goes into effect, he begins to do the dangerous dives. Milton, consciously, takes on riskier behavior than he had before he got insurance because he has reduced his liability.

Ex-post moral hazard refers to the behavior of a party after an event occurs. For example, suppose a person takes out a loan from a bank to start a business. After he receives the credit, he may say his business failed—although it was profitable—to get a bailout or tax write-off. This purposeful behavior is known as an ex-post moral hazard.