Final answer:
A member who chooses not to drive to avoid accidents is practicing risk avoidance, a strategy of eliminating risk, which contrasts moral hazard, where insured individuals may partake in riskier behaviors. Moral hazard and adverse selection are challenges insurance companies face in categorizing individuals into risk groups.
Step-by-step explanation:
A member who refuses to drive for fear of being involved in an accident is managing risk by avoidance. This tactic involves eliminating the possibility of risk by not engaging in an activity that could lead to the feared outcome. In the context of insurance and risk management, this behavior is the opposite of a moral hazard, where individuals may engage in riskier behaviors because they have insurance coverage.
Moral hazard occurs when people with insurance behave differently than they would without it. For instance, someone with car insurance may be less cautious about where they park their vehicle, knowing that repairs from dents or theft will be covered. In contrast, without insurance, a person may implement strict measures to protect their assets, such as a business installing high-end security systems to prevent theft and fire, showing the impact of insurance on risk management decisions.
Insurance companies face challenges when classifying people into risk groups, leading to issues of moral hazard and adverse selection. Adverse selection involves risks related to uninformed decisions, while moral hazard involves changes in behavior post-contract due to the safety net insurance provides.