FIN 800 Lecture Notes - Lecture 9: Haymarket Media Group, Enterprise Risk Management, Moral Hazard
Document Summary
Introduction within the risk management ield, the subject of ethics has been long inluenced by insurance theory, and especially by the relaionship of moral hazard to insurance. In this context, moral hazard has been deined as condiions or acions that incenivize illegal or immoral behavior. in the extreme, moral hazard actually can lead to a direct increase in loss frequency or magnitude. For example, the presence of property insurance coverage has been shown, in some circumstances, to increase the frequency of arson-related losses. Moral hazard ofers a reminder that while risk management acions may have posiive intenions and results (reduced losses, enhanced gains), they may also produce negaive efects if not carefully considered. There are limitaions to this paricular moral hazard framework. First, reliance on a deiniion that is speciic to insurance has meant that the term invariably is linked to loss- producing behavior, whereas a broader deiniion would emphasize incenives to take risks while transferring the costs to others.
