Moral hazard types

If HRM practices lower moral hazard behavior, HRM practices ought to have an impact on the type of claims that are filed. If the potential for moral hazard is greatest where the costs of monitoring are largest, then relatively more evidence of moral hazard should be seen with respect to those types of claims that are most difficult to monitor. Again, this is especially true for sprains, strains, and cumulative trauma conditions. 

Second, the multinomial estimates provide no corroborative evidence of moral hazard behavior with regard to other (non-HR) results Downsizing has no impact on claim types, increases in the replacement rate do not increase the proportion of lower back sprains, and self-insurance does not lower the proportion of lower back sprains. As the replacement rate increases, the opportunity cost of being out of work on a workers compensation claim falls. Claims-reporting moral hazard will likely increase, especially for injuries (such as lower back sprains) whose work origin is difficult to monitor or detect. Hence, an increase in claims-reporting moral hazard ought to increase the proportion of low back sprains. 

One example is the use of legislation to prevent affected workers making certain types of claims - for example, for management/worlqrlace-induced stress. This can have the effect of reducing the driving force (moral hazard) which increased compensation premiums have on the preventive effort. 

PROPERTY CLAIM SERVICES (PCS), a company operating in the USA, or PERILS, a similar entity operating in Europe, collect loss data from the major insurance companies after a catastrophe and aggregate them into an overall loss estimate. Risk transfer solutions based on these market estimates tie particular recoveries to the overall loss reported by the insurance market. By removing the direct connection between recoveries and particular portfolio losses, moral hazard is greatly diminished. If the event created a large loss for the insurance industry as a whole, it seems intuitive that recoveries for a particular insurer should be somewhat proportional to the overall loss. Naturally, this type of index works best for large companies whose portfolios mimic the distribution of the entire industry. For companies that operate within an industry niche, these types of solutions need to be tailored somehow since they may involve too much basis risk, the potential difference between actual losses and recoveries. 

Two known issues in offering insurance coverage are moral hazard and adverse selection (note they are applicable to not only catastrophe earthquake but other more common types). Moral hazard refers to a case where more risky situations (i.e., increase in chances of experiencing loss and/or increase in the extent of loss) are created by the behavior of a stakeholder. An example of moral hazard is that a policyholder, after a damaging earthquake, may cause additional damage to his/her property to receive insurance repayment (when the incurred loss is relatively minor and is near the threshold of deductible). On the other hand, adverse selection refers to a situation where an insurer cannot distinguish between stakeholders having lower and... 

To alleviate the effects due to moral hazard and adverse selection, introducing pro rata share of the risks and differentiating the rates according to physical parameters related to seismic hazard and vulnerability of the covered properties (e.g., geographical region, structural type, built year, and number of stories) are useful (see Table 1). Other proactive ways to avoid adverse selection and encourage physical DRR measures are to implement an effective incentive scheme in determining insurance premium rates (e.g., Japanese insurance system). 

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