Moral Hazard Essay

Throughout the 20th century, our views of life dealing with insurance have drastically changed. It all started off so small and as each year progressed, insurance companies have steadily increased and made profit with money. Insurance companies continue to remain a mystery to people of how they make their money. Now in the 21st century, Insurance companies have definitely taken advantage of their two most important sources of selling insurance and making money. Insurance companies make money from premiums collected from their customers and their earnings from investing in those premiums they started. Furthermore, as everyone knows, Insurance companies happen to charge customers a monthly premium for their actual services. This definitely shows that by this way it is easy to show
Insurance companies make their money from their monthly premiums and investment returns. One of the main expenses for any insurance company is covering the loss for an individual, firm, place, etc. As a business it is known that Insurance companies identify the client before actually letting them use their services to see if they could come out to make a profit. A key risk factor that is known today is Moral Hazard. Moral hazard is unbalanced asymmetric information. Insurance companies control Moral Hazards by offering a way for the insured person or party to pay something small for the services they have to prevent them from using it frequently. For example, with the health insurance markets, Insurance companies will allow the individual to use their services but they will have to pay a co-pay and deductible so that the costs will not be raised even more for the insurer. According to J.B. Maverick, “Such a policy and usage of deductible amounts in an incentive for the insured to cut down on services and to avoid making claims” (Maverick Web