The insurance industry has developed a myriad ways to cope with moral
hazard. Co-insurance, investigating fraudulent claims, deductibles, and
incentives to reduce claims are all effective. The residual cost of
moral hazard is spread among the insured in the form of higher
premiums. No reason not to emulate these stalwart risk traders. They
bet their existence of their ability to minimize moral hazard - and
hitherto, most of them have been successful.
The Business of Risk
By: Dr. Sam Vaknin
Also published by United Press International (UPI)
Risk transfer is the gist of modern economies. Citizens pay taxes to
ever expanding governments in return for a variety of "safety nets" and
state-sponsored insurance schemes. Taxes can, therefore, be safely
described as insurance premiums paid by the citizenry. Firms extract
from consumers a markup above their costs to compensate them for their
business risks.
Profits can be easily cast as the premiums a firm charges for the risks
it assumes on behalf of its customers - i.e., risk transfer charges.
Depositors charge banks and lenders charge borrowers interest, partly
to compensate for the hazards of lending - such as the default risk.
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