Final answer:
Moral hazard increases insurance premiums because it encourages riskier behavior, leading to more claims. Insurance companies offset this by implementing deductibles, copayments, and coinsurance to make insured parties share the financial risk. Imperfect information exacerbates the moral hazard problem by hindering accurate premium adjustment.
Step-by-step explanation:
How can moral hazard lead to more costly insurance premiums than one was expected? Moral hazard refers to the situation where individuals or businesses engage in riskier behavior when they have insurance coverage compared to when they are not insured. This increased risk leads to more claims, prompting insurance companies to raise premiums to cover the higher cost of payouts. Higher premiums reflect the inflated risk associated with insured parties taking less care to prevent losses due to confidence in insurance coverage mitigating their potential losses.
To counter moral hazard, insurance companies utilize various strategies. Deductibles, copayments, and coinsurance are measures that ensure the insured party retains some financial responsibility in the event of a claim. With these out-of-pocket costs, insured individuals are less likely to engage in risky behavior since they will incur a portion of the costs themselves, thus reducing moral hazard and potentially reducing insurance premiums.
It's important to recognize that imperfect information contributes to the moral hazard problem. An insurance company with perfect information could adjust premiums to match risk behaviors, but this is not feasible in reality. Hence, moral hazard contributes to ongoing challenges for insurers in setting accurate premiums.