Osama borrowed money from Al Raghey bank to purchase a fishing boat. He purchased insurance on the boat

Question

Question: Osama borrowed money from Al Raghey bank to purchase a fishing boat. He purchased insurance on the boat. Osama because of the fish prices were low and he did not catch many fish, he had difficulty to pay loan. Osama intentionally sun boat, collected from his insurer and paid off the loan balance. This scenario illustrates the problem of

Options:

1.  Adverse selection
2.  Moral hazard
3.  Fundamental risk
4.  Morale hazard

Answer 1

2. Moral hazard

Osama borrowed money from Al Raghey bank to purchase a fishing boat. He purchased insurance on the boat. Osama because of the fish prices were low and he did not catch many fish, he had difficulty to pay loan.

Osama intentionally sunk boat, collected from his insurer and paid off the loan balance. This scenario illustrates the problem of Moral hazard.