What is a Moral Hazard?
The risk that a sponsor may behave differently (e.g., less careful risk management) when losses are transferred to ILS investors.
Moral Hazard
The risk that a sponsor may behave differently (e.g., less careful risk management) when losses are transferred to ILS investors.
How it works in practice
A property insurer with full reinsurance coverage for flood losses might be less rigorous in enforcing underwriting standards for policies in flood-prone areas because its own balance sheet is protected. Cat bond structures mitigate this by requiring the sponsor to retain some risk below the attachment point, giving the sponsor a financial incentive to maintain disciplined underwriting.
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