Moral hazard in Insurance In insurance markets,moral hazard occurs when the behavior of the insured party changes in a way that raises costs for the insurer,since the insured party no longer bears the full costs of that behavior.Moral hazard in Insurance ◼ In insurance markets, moral hazard occurs when the behavior of the insured party changes in a way that raises costs for the insurer, since the insured party no longer bears the full costs of that behavior