Moral hazard and insurance / by kevin murray

Most people believe that insurance is a very good thing, even necessary, and that overall, having insurance is beneficial because for a relatively small premium or co-payment, the insured is covered for catastrophic or unexpected losses. defines moral hazard as "the risk that an individual or organization will act irresponsibly or recklessly if protected or exempt from the consequences of an action."  That is to say, moral hazard, is exactly the problem with any organization or institution which is "too big to fail," and consequently gets bailed out by the government.  So too, moral hazard is a potential problem for all corporate officers that are able to avail themselves of excessively leveraged or ill-advised risks, knowing that they will not personally suffer the consequences of any corporate failings, which includes bankruptcy or receivership, if such risks fail.  Additionally, moral hazard is the issue for people that will behave differently and hence more irresponsibly if their belief is that whatever that they do, will be covered fully by their insurance


One of the most inane sayings of all time, which purports to be inspirational, is the question, "If you knew you couldn't fail what you do?"  Incredibly, the amount of credulous people that buy into this so-called profound nonsense, indicates that they are completely clueless when they actually bother to respond to this question by coming up with all sorts of ideas and things that they would actually do.  Clearly, the only correct answer, takes but a moment of reflection, which is, that a motivated person would do exactly nothing, because when it is not possible to fail, then the assignment so given is far too simple to perform, and therefore one needs instead to push on to something that actually requires effort, challenge, and the actual fear of failure.


Unfortunately, because of moral hazard, there are far too many institutions, corporations, and individuals that treat what should be seen as suspect, as something that is a certainty, and consequently go ahead and treat such as if they could not possibly fail, not because they actually believe it, though, some do, but mainly because of their own selfish self-interest.  Nor is this limited to just institutions, corporations, and individuals, for often governments behave in exactly the same way, especially when those governments take it upon themselves to act egregiously wrong internally or externally to the national interests, by ill-advised foreign escapades, or the taking on of too much national debt, and so on, of which, because there doesn't appear to be any one person that "the buck stops with," it is essentially moral hazard, run amok.


It is well known that counterfeit money drives out good money; so too, moral hazard, will, if not dealt with at its source, essentially take something as sound in concept as insurance, and effectively eviscerate it, so that, a government that will not service its debt, may well abandon that currency with dire consequences for its population; a government that continually abuses the sovereignty of other nations, will eventually suffer such abuse in return; a  behemoth corporation that over leverages itself in risky investments will lead to not only its collapse but even possible national economic collapse; and an individual that takes unnecessarily dangerous risks when they should not, may suffer unto death.