Final answer:
The correct answer to the situation described is 'moral hazard'. It refers to the tendency of insured individuals or entities to take on riskier behavior, knowing that the financial consequences will be mitigated by the insurance.
Step-by-step explanation:
The situation in which people engage in riskier behavior when insured against risk than they would if they did not have insurance is known as moral hazard. This behavior occurs because the individual feels protected by the insurance and therefore may behave less cautiously. For instance, someone with health insurance might skip routine health precautions or a business with property insurance might adopt less stringent security measures.
Moral hazard is a significant issue in insurance markets due to imperfect information. Insurance companies cannot monitor all risks at all times, and this asymmetry in information can lead to increased premiums and changes in policy conditions to try to mitigate the effects of moral hazard.