Final answer:
The concept of facing potential financial loss in insurance is known as 'risk'. Premiums are regular payments to an insurer based on this risk, and deductibles, copayments, and coinsurance are methods to reduce moral hazard by having policyholders share a portion of the costs.
Step-by-step explanation:
The concept of the policy owner needing to face the possibility of losing money or something of value in the event of a loss when purchasing insurance is called risk. Insurance policies are a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An entity that provides insurance is known as an insurer, insurance company, insurance carrier, or underwriter. A person or entity who buys insurance is known as a policyholder, while a person or entity covered under the policy is an insured. Policyholders pay a premium, which is priced by the insurance company based on the probability of certain events.
Insurance companies use various methods to reduce moral hazard, which is the risk that a party insured might engage in riskier behavior because it does not bear the full consequences of that behavior. To mitigate this, policies often include a deductible—an amount paid out of pocket before the insurer covers the remaining costs—and may also have co-payments or coinsurance where the policyholder shares a portion of the total cost.