The Ethics of Moral Hazard Revisited

Historically, the term “moral hazard” came with strong moral connotations, as moral
blame attached to those abusing insurance schemes. However, economists have taken
moral hazard as a technical term, seeing individuals’ risk-adjusting behavior simply as
a rational calculated response to insurance and insured situations. But the question still
lingers: is morally hazardous behavior – sometimes or always – immoral? This chapter
discusses the debate in ethics about this question. It argues that moral hazard is pro
tanto morally wrong. The analysis is grounded in the fact that insurance puts people in
a fiduciary relationship. They then are under a moral duty to act on behalf of the
others in their insurance pool and try to reach the optimum level of social risk. Yet,
there are exculpating reasons which diminish moral responsibility. Finally, the policy
implications are discussed, illustrated by the moral hazard posed by large banks in the
financial crisis.