Final answer:
A statement made by an insurance applicant on the application that becomes part of the contract is considered a representation, which is crucial for the issuance and terms of the policy. Misrepresentation can result in the contract being voided. The concept of moral hazard also plays a role in insurance dynamics, as insured individuals have less incentive to avoid risk.
Step-by-step explanation:
When an insurance applicant makes a statement on an application that becomes part of the contract, the statement by the insured is considered to be a representation. A representation is an assertion made by an applicant for insurance that the insurer uses to decide whether or not to issue a policy and what terms to offer. If a representation is later found to be false or misleading, it can potentially void the contract. This concept is integral to insurance contracts because it relies on the principle of utmost good faith, where both parties must be entirely honest in their dealings with one another.
Moral hazard is also a key concept in the dynamics of insurance contracts. This situation occurs when an individual has insured against a risk and subsequently has a decreased incentive to take care to prevent the risk from occurring. For example, someone with car insurance may engage in riskier driving behavior, knowing that the insurance company will cover accidents.