How is 'moral hazard' different from 'physical hazard'?

Moral hazard refers to the changes in behavior that occur when a person is insulated from the consequences of risk, often due to insurance coverage. For example, an insured individual might engage in riskier behavior since they know that their insurance will cover any potential losses. This behavior-based aspect highlights the influence of human intention and decision-making on risk levels.

In contrast, physical hazard involves inherent physical conditions that may increase the likelihood of a loss. These are tangible risks related to the environment or the condition of things, such as a building's faulty wiring leading to a higher risk of fire. This condition-based factor is more about the physical attributes of insured items and their surroundings.

Understanding that moral hazard stems from behavioral changes while physical hazard arises from actual conditions allows for better risk assessment and management in insurance. Therefore, acknowledging the distinct nature of these two concepts is crucial for effective underwriting and loss prevention strategies in the insurance industry.