What does "moral hazard" refer to in insurance?

Moral hazard refers to the increased risk that arises when an individual engages in riskier behavior because they are insured. When people have insurance coverage, they may feel less incentivized to avoid potential losses because they know that the insurance company will cover them in the event of a claim. This change in behavior can lead to higher costs for the insurer, as the likelihood of a claim may increase if the insured party is not taking the same level of precautions they would without insurance.

In this context, the answer chosen accurately captures the essence of moral hazard. It highlights how the presence of insurance may influence behavior in a way that increases the overall risk for the insurer. The other options do not capture this concept effectively, as they either misinterpret the behavior change that comes with having insurance or incorrectly describe the effects on premiums and claims.