How can an individual’s indifference to risks increase potential losses in insurance?

An individual’s indifference to risks can lead to increased potential losses in insurance through morale hazards. Morale hazards refer to a situation where an individual’s attitude or lack of concern regarding risk can result in behavior that increases the likelihood of loss. For instance, if a person feels indifferent about their property or health, they may not take necessary precautions, such as maintaining their home or practicing safe habits, thereby making losses more probable.

This indifference can lead them to engage in riskier behaviors, assuming that insurance will cover any potential losses without considering the impact of their actions. Such behavior undermines the principles of risk management and can contribute to higher claims and premiums, ultimately affecting the overall sustainability of the insurance pool.