Posted tagged ‘Insurance’

Charles Hugh Smith: When Risk Is Offloaded Or Hidden, It Creates Moral Hazard.

August 23, 2013
Moral hazard

Moral hazard (Photo credit: jcbear2)

Risks have consequences, and when these consequences are divorced from risk, it creates moral hazard. This means the person taking the risk will not be in a position to weigh all the consequences of the risk, before he makes a decision to start, or continue a particular activity. In this article titled, The Source Of Systemic Crisis: Risk And Moral Hazard, Charles Hugh Smith, at oftowminds.com, explains risk and moral hazard as it pertains to how insurance works, as compared to how noninsurance insurance works. There is a big difference between life insurance, fire insurance, car insurance, on the one hand, and Government programs like social security insurance, medicare insurance, medicaid insurance on the other. Here are some excerpts from the article.

There are all sorts of candidates for the root cause of the systemic global financial crisis, but if we separate the wheat from the chaff we’re left with risk and moral hazard. Pointing to human greed and cupidity as the cause doesn’t identify anything useful about this era’s crisis, as human greed, self-interest and opportunism are default settings.”

“The key to understanding risk is to ask where it is being offloaded. Risk cannot disappear, it can only be transferred or cloaked.” (more…)