Final answer:
Purchasing health insurance is a risk transfer method used to mitigate financial consequences by sharing the risk with an insurer and including deductibles, copayments, and coinsurance to reduce moral hazard.
Step-by-step explanation:
Purchasing health insurance is an example of a method of hazard reduction known as risk transfer. Risk transfer is a strategy where a person or entity reduces the potential financial consequences of an uncertain loss by handing over part of the risk to an insurance company. Health insurance policies may include elements like deductibles, where the insured party pays a certain amount before the insurer's coverage begins; copayments, which are set fees for specific services; and coinsurance, where the costs are split between the insurer and the insured at a specified percentage.
Investigations to prevent insurance fraud and monitoring of behaviors, such as installing security and fire sprinkler systems, are also methods used by insurance companies to reduce the effects of moral hazard. By involving the policyholder in the cost through these methods, insurers aim to encourage individuals to avoid negligent behavior that could lead to a higher chance of a claim.