Insurance Moral Hazard Problem in the U.S.

Insurance Moral Hazard Problem in the U.S
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1. Problem
The insurance moral hazard problem is one of the issues in risk management. In the case of workers' compensation benefits, there is high frequency and low severity loss. Since all benefits are nontaxable income, some moral hazard problems could happen, especially for low-wage earners. Moral hazard reflects opportunistic behavior in which one party seeks their own benefit at the other's expense, not observing or being informed of the conduct. The insurance moral hazard problem affects payers who bear high costs, insurance companies, and the payers when people take advantage of the claims as the cost of their actions falls on others.
2. Context
Insurance companies and payers offer payouts, but the insurance receipts may take more risk or take advantage of the circumstances as the cost of actions is on the insurance companies or payers. An example of an insurance moral hazard problem is an employee earning $500/week and $380 after tax per week, but that employee could get $333 (2/3 of $500) from disability. Medical expenses are 100% reimbursement with no deductibles, therefore and this is also a moral hazard. The insurance moral hazard problem occurs when a person or entity assumes more risks in their insurance or investments because the gains will be for them. In contrast, other people or entities will bear the losses or costs. Those who suffer negatively lack information and do not know the intentions of insurance compensation recipients. Thus, there is a problem as the recipients have no incentive to be cautious while the payers seek to minimize payments.
3. Causes
One of the main causes of the problem is that the insurance...