What term describes an increase in an insurance company's risk as a result of claims paid on the policy?

The term that accurately describes an increase in an insurance company's risk as a result of claims paid on the policy is moral hazard. Moral hazard occurs when the behavior of the insured party changes as a result of having insurance coverage. When individuals know they are protected against potential losses, they may take on riskier behavior or be less careful, leading to an increase in the likelihood and frequency of claims.

For example, if a person holds a comprehensive insurance policy for their car, knowing that any potential damage will be covered may lead them to drive less cautiously. This shift in behavior can result in more claims being filed, thereby increasing the risk for the insurance company.

Understanding moral hazard is crucial in the insurance industry, as it influences underwriting practices and the overall management of risk. Insurers often implement measures, such as deductibles or monitoring, to mitigate the effects of moral hazard and maintain a balanced risk profile.