Morale Hazard

From our previous discussion, i will like to complete the type of hazard that we have.

Morale Hazard

Morale hazard is the carelessness or indifference attitude to loss on the part of the insured, because of the existence of insurance.  The insured may have no deliberate intention to bring about a loss as is the case in the moral hazard, but he is simply  careless to prevent a loss.  His carelessness thereby increases the chance of loss.

For example, many people, who insured their vehicles, may decide not to show sufficient concern for the safety of their vehicles as a result of which they could park the vehicles carelessly anywhere without locking them.  This attitude would increase the chance of loss through theft.  On the other hand, as a sort of reaction to an unfriendly environment, a person may deliberately allow things to go bad. For example, a frustrated worker receiving very small salary may decide not to show sufficient care to ensure the safety of the machinery he is using at his place of work e.g. government drivers etc.  Morale hazard may be associated with employees and the society.

·         Employees

If the relationship between management and employees is poor, or if the worker’s salary is poor, employees may decide not to show much concern for the safety of their equipment.  And in some extreme cases they may damage their equipment.

·         Society

The general attitudes of the society may influence the level of risk and the incidence of claims.  For example, in the course of public demonstration, the demonstrators can destroy properties or set them ablaze.  The action of the demonstrators is not motivated by consideration of financial benefits, but simply to register their anger on the system.  Their action can therefore be classified as morale hazard.

Moral hazardis different from Morale hazard.  Moral hazard is motivated by selfish financial interest on the part of the insured.  It is a product of immoral behaviour.  Morale hazard is not motivated by any selfish immoral consideration.  It is just a careless or indifferent attitude of the insured to loss.

Uncertainty

A sense of uncertainty surrounds every human undertaking.  As students, we do not know whether we shall pass our examinations and get qualified, we do not know if we shall be lucky enough to secure the job that we desired, we do not know if our marriage would be successful.

If a businessman buys a new machinery, he cannot know whether the machine will produce the expected output, he will not know whether the employees will be prepared to work with the machine, he will not know whether he will be able to get the necessary spare parts for the machine, he will not know whether there will be market for the increased output of the business, he cannot know whether the employees will not go on strike, he cannot know whether thieves will steal his products, he cannot know whether the whole factory will burn down.  From the above, it will be seen that a businessman operates in an uncertain environment.

However, in a few cases, the businessman knows with certainty what will happen in future.  For example, he knows that if he increases the number of employees, the salary bill will rise.  Generally, businessman operates in an uncertain environment.