Final answer:
Moral hazard refers to increased risk-taking due to the presence of insurance. To combat this problem, insurance companies employ strategies like deductibles, copayments, and coinsurance. Policies that reward preventive behaviors also help mitigate moral hazard.
Step-by-step explanation:
The concept you are asking about relates to the Moral Hazard Problem in the context of insurance and economics. The moral hazard problem occurs when individuals or businesses engage in riskier behavior because they have insurance, which they otherwise wouldn't if uninsured. To mitigate moral hazard, insurance companies implement strategies such as deductibles, copayments, and coinsurance, which require policyholders to pay a portion of the costs, thereby encouraging more cautious behavior.
Additionally, insurance companies might reduce premiums for businesses that install and maintain high-level security and fire sprinkler systems, reflecting monitored preventive measures against risk. While it is impossible to completely eliminate moral hazard, combining cost-sharing mechanisms and behavioral monitoring helps in reducing the likelihood and impact of riskier actions by the insured.