ERM Glossary: Moral hazard

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Moral hazard is the risk that a party (stakeholder) behaves in a way which suits that party when they would have behaved differently if they had been fully exposed to the consequences of their behaviour.

For example, policyholders may be less careful when protecting their insured assets because they are insured against losses arising from accidents or theft.

Moral hazard is often related to information asymmetry. The party subject to moral hazard may have information allowing them to exploit another party who does not have access to that information.

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