Moral Hazard and Insurance

In the Wall Street Journal, today, I say the words “moral hazard” in a blurb pointing the reader to an article about the Fed’s disclosure concerning who-got-what during the bail out crisis.

It reminded me of the wake up call I got way back in the insurance industry.  There were some products that we simply would not sell due to moral hazard: the risk an insurance company faces that its policyholders will not behave in a dishonest or immoral manner. For instance, although we created and sold “accidental death and dismemberment” policies, we would not sell them for children. Why? Because of the risk that some desperate parents would cut off parts of their children’s bodies in order to cash in on the policy.

Think it doesn’t happen? Think again. Actually, there are many tales to tell. The old cliché is a business owner burning down his building in order to fraudulently cash in on his insurance policy, or the “murder mystery” scenario in which a greedy spouse has his or her spouse killed for the life insurance pay out. But there are horrible things that people have done to their own bodies or to their children in order to cash in on such policies, too.  What a sick world — definitely full of those who are “lovers of money… without self-control, brutal…”

Well, what a downer of a post!  I will have to follow up soon with something more positive. 🙂

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