FDIC Insurance Premiums and Moral Hazard
One of the challenges the insurance industry faces is “Moral Hazard.”
Moral hazard is a the observed phenomenon whereby, because something is insured, it becomes more likely to occur. If a bad event (e.g. breakage or theft) will cost a certain amount, then if that event is insured, it will cost a bit less. This makes the bad event less bad–which is the point of insurance. Unfortunately, it also means that the insured person will not work quite as hard to prevent the bad event from happening, or, in extreme cases, may even cause the bad event to occur.
A silly illustration: if a grocery store could somehow insure every dozen eggs for $1000 against breakage, “Moral Hazard” is the insurance industry’s way of recognizing that there would somehow be a lot of broken eggs.
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