Which of the following best defines a morale hazard?

A morale hazard refers to a situation where an individual’s behavior becomes careless or less responsible because they have insurance coverage. This can occur when a person believes they will not suffer the financial consequences of their actions, leading them to engage in riskier behavior than they otherwise would. For example, someone might drive more recklessly if they know they are covered by car insurance, assuming any potential damages will be taken care of by their policy. This concept highlights the psychological aspect of insurance and how it might influence decision-making, reflecting a lack of concern for risk when insurance is in place.

The other options touch on different aspects of risk but do not accurately capture the essence of a morale hazard. Options involving deliberate actions or illegal activities suggest a more intentional disregard for potential consequences, while inherent risks associated with products describe the risks that come with the nature of the product itself, rather than the behavior of the insured individual.