Insurance provides protection for the insured and can also be profitable for companies providing the product. There are also risks for both the provider and policy holder, which is where moral hazard and adverse selection come into play. The two terms are often used to evaluate and manage risk within insurance markets and economics. Moral Hazard The belief that a person engages in riskier behavior once they’re insured is known as moral hazard. They engage in said behavior because they know the entity providing the insurance will take responsibility for any negative consequences that occur. For example, an individual with life insurance may decide to do more risky activities like skydiving or racing when they know insurance will cover their funeral costs and family when they die. Likewise, someone with home insurance may not replace their smoke detector batteries for months because they know if there is a house fire, they’re financially covered. A real-life example of moral hazard could be the 2008 global financial crisis driven by banks taking aggressive risks because they knew they’d be bailed out by the US government. Moral hazard