Final answer:
Insurance companies reduce moral hazard by offering lower property insurance rates to businesses that implement high-end security and fire sprinkler systems and conduct annual inspections. This type of risk control is an exemplar of mitigating economic risks by preemptive action, effectively managing potential catastrophic threats with little downside if they do not materialize.
Step-by-step explanation:
One type of risk control used in managing moral hazard and economic risks is the implementation of preemptive safety and security measures, such as fire sprinkler systems and comprehensive security systems. Insurance companies often encourage the use of these measures by offering lower insurance premiums to businesses that adopt them. For example, a business that installs and regularly inspects high-end security and fire sprinkler systems is likely to benefit from reduced property insurance rates. This approach helps to mitigate some of the risks associated with moral hazard by reducing the likelihood of insurance fraud and the potentially devastating consequences of uncontrolled risks, like fire outbreaks.
Moreover, this risk control method aligns with rational behavioral choices when facing asymmetric risk -- considering serious and potentially catastrophic threats, and putting in place measures to mitigate them even if the likelihood of occurrence is low. The rationale is that the potential consequences of ignoring such threats could be far more costly than the resources allocated to prevent them, akin to the principle behind purchasing insurance to protect against low-probability but high-impact events.