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

The term that describes an increase in an insurance company's risk as a result of claims paid on the policy is moral hazard. Moral hazard refers to the concept where the behavior of the insured party changes as a result of having insurance coverage, leading to a higher likelihood of claims. When individuals or entities know they are financially protected, they may take greater risks than they otherwise would, which can lead to more claims being filed. This behavioral shift increases the risk for the insurance company, as the economic principle of moral hazard highlights how insurance can create a divide between risk and responsibility.

In contrast, underwriting involves the process of evaluating risk and determining the terms of insurance policies. The loss ratio is a metric used to compare the losses paid out against premiums earned, indicating the performance of an insurance company. Adverse selection occurs when there is an imbalance in information between buyers and sellers, leading those at higher risk to be more likely to purchase insurance. While both adverse selection and moral hazard involve risk and claims, moral hazard specifically relates to behavioral changes post-coverage, making it the correct choice for this question.