Final answer:
Insurance is a method to protect against financial loss by making regular premium payments to an insurance firm, which then compensates for covered losses. Moral hazard can occur when individuals take greater risks because they are insured. Coinsurance is a feature that ensures policyholders remain partly responsible for losses.
Step-by-step explanation:
Insurance is a financial mechanism designed to protect individuals and organizations from significant financial losses by distributing risk among many policyholders. Individuals or entities purchase an insurance policy and make regular payments known as premiums. In return, the insurance company agrees to compensate, or indemnify, the insured party in the event of specified losses, effectively managing the financial impact of unforeseen events.
Aspects such as moral hazard play a role, where individuals may behave recklessly because they know they are protected from the financial repercussions of an insured event. Additionally, policies may include coinsurance, a provision where the policyholder and the insurance company share the costs of a loss. This helps to prevent moral hazard by ensuring that the policyholder retains some financial responsibility.