What does the term "moral hazard" signify in the context of insurance?

The term "moral hazard" specifically refers to the concept where individuals or entities may take greater risks because they do not have to bear the full consequences of those risks, often due to insurance coverage. In this context, when insured individuals feel shielded from potential losses, they might engage in riskier behavior than they would if they were fully responsible for the consequences of their actions.

For example, someone with comprehensive car insurance may be less careful about locking their car or avoiding risky driving behaviors because they know that any financial loss would be covered by the insurance. This behavior increases the overall risk for the insurer and is essentially what moral hazard represents in the insurance industry. Thus, the correct answer aligns with this definition, as it highlights the link between the insured's behavior and the increased risk they present due to their carelessness.