Research Handbook on the Economics of Insurance Law
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Research Handbook on the Economics of Insurance Law

Edited by Daniel Schwarcz and Peter Siegelman

Insurance law and insurance economics each have long and distinguished scholarly histories, but participants in the two disciplines have not always communicated well across academic silos. The Handbook encourages more policy-relevant insurance economics scholarship and more economically sophisticated legal scholarship by bringing together original contributions from leading scholars in insurance law and insurance economics on a range of issues involving insurance law and regulation.
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Chapter 3: Moral and other hazards of economic analysis of health insurance

John A. Nyman


Perhaps no single concept has influenced economists’ perspective on the desirability of health insurance in the United States as much as ‘moral hazard.’ Moral hazard was a term coined by insurers to represent the increase in losses that occurred once something or someone (a cargo ship, an automobile, a house, a life, health, and so on) became insured. As its name suggests, moral hazard was viewed originally as an ethical issue by insurers, but economists transformed it into a scientific term that simply described a type of human behavior that was derived from self-interest. For economists, moral hazard has traditionally referred to any increase in the loss or payout from the insurer that is caused by becoming insured. If the increased loss is manifested as an increase in the probability of a loss occurring, then it is referred to as ex ante moral hazard. If the increased loss is manifested by an increase in the amount of the loss once the event has occurred, then it is referred to as ex post moral hazard. In the United States, it is the concept of ex post moral hazard that has dominated policy related to health insurance. Thus, the fear associated with moral hazard is not whether the presence of insurance will cause people to take less care to prevent illness, but that it will lead to more use of healthcare for a given level of illness – more frequent doctor visits, an additional hospitalization, and so on.

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