De-Moral Hazarding: Beat Insurers at Their Own Game and Build Wealth in the Process

When you carry risk, you carry wisdom.

A Smarter Way to Manage Risk

At Personal Finance Reimagined (PFR), we believe the path to long-term wealth is paved not just with good intentions, but with better decisions. One of the most powerful tools we teach—both in the classroom and with clients—is called de-moral hazarding. It flips traditional insurance thinking on its head.

Now, let’s acknowledge something up front: “Moral hazard” is a weird phrase. It sounds like something abstract—or worse, something unethical. But in reality, moral hazard is a behavioral trap that can quietly erode both your finances and your discipline. It is absolutely something to understand—and minimize. At PFR, we do NOT teach people to avoid risk—we teach them to strategically choose the risks they take. Wealth is built through intentional exposure to manageable risk, not by shielding yourself from every possible loss.

That is exactly what this article will help you do. We will unpack how insurance really works, explain what moral hazard means in plain language, and introduce a time-tested approach to help you manage risk with clarity and confidence. De-moral hazarding is not just theory—it is a practical strategy for building wealth and living intentionally by avoiding the behavioral trap of overinsuring and under-owning your risk.

Understanding the Insurance Business Model

Most people view insurance as a safety net—and it is. But it is also a business built on the economics of pooled risk and human psychology. Individuals are willing to transfer risk because it offers protection from events that could cause financial ruin. While a single person might be devastated by a $100,000 health event or a house fire, an insurer managing that same risk across thousands of clients is not.

Thanks to actuarial science, insurers understand the true probabilities behind these risks. By spreading the exposure across a large pool and investing the capital collected from premiums, they can insure high-impact events without risking their own solvency. This transforms ruinous risk for the individual into manageable variability for the insurer.

However, most people do not have a finely tuned, probabilistic grasp of risk. Instead, they tend to be risk-averse—willing to pay more than the actual cost of a potential loss for the peace of mind that comes with transferring that risk. Even after accounting for the important difference between risk (a measurable possibility) and ruin (a life-altering catastrophe), people routinely overpay for coverage.

Insurers capitalize on this. They price premiums to exceed expected losses, and they must—because their operating model includes substantial overhead:

• Brick-and-mortar infrastructure and administrative costs

• National ad campaigns and catchy jingles

• Claims adjusters, legal teams, and customer service departments

• Sales commissions and broker incentives

This built-in cost structure guarantees that premiums must surpass the expected value of the insured loss. So if you are insuring small, manageable risks that you could absorb or prevent, you are not buying protection—you are subsidizing the system.

The Second Margin: Why Insurers Profit by Denying Claims

Insurance is a strange kind of product. When you buy something on Amazon, you expect to use it. Your intent to consume aligns with the seller’s intent to deliver. This symmetry between supply and demand creates incentives to improve the product, reduce costs, and generate value for both parties.

Insurance works differently. It is the only product you buy hoping never to use. In fact, the value proposition of insurance is sold during the peace of mind phase—before anything bad has happened, and with the hope that nothing bad does happen in the future. That reassurance feels valuable in the moment, but once something does go wrong and you file a claim, the dynamic changes entirely. The claims process is where peace of mind gives way to reality—and you discover just how difficult it can be to access the benefit you thought you already paid for. The problem is, your premiums are already sunk by the time you reach that phase, locking in the cost long before you find out what the actual value is.

Unlike Amazon, which celebrates customer satisfaction, insurers are incentivized to delay, deny, or reduce payouts. That is their second margin—the first being the markup they charge on risk, the second being the savings they generate by minimizing what they pay out.

We see this play out regularly in the headlines:

• “Homeowners Say Insurer Lowballed Repairs After Natural Disaster” – NBC News

• “Denied Claims and Delay Tactics: Lawsuit Accuses Major Health Insurer of Systemic Underpayment” – Reuters

• “Auto Insurers Use AI to Undervalue Vehicles, Class Action Alleges” – The Verge

These are not rare anomalies—they reflect structural incentives baked into the business model. An insurance company’s ideal customer is someone who pays every premium and files zero claims. The second-best customer is someone who files a claim that can be negotiated down or quietly dropped.

This is not to say all insurers are unethical. Many fulfill their contracts in good faith. But the industry-wide operating model encourages claim minimization, not maximization. Which leads us to a critical behavioral concept: sludge.

In behavioral economics, sludge is the intentional use of friction to discourage people from taking an action that is technically available to them. While nudges help you do what is in your best interest, sludge slows you down, wears you out, and makes quitting the easiest option.

Insurers have become highly skilled sludge engineers. They know that if a claims process is tedious or confusing enough, many people—especially those already under stress—will simply give up. Examples include:

• Requiring outdated submission methods like fax or mailed forms, even when digital uploads are available elsewhere in the organization

• Sending vague or incomplete denial letters without actionable next steps or contact info

• Imposing strict response deadlines while taking weeks or months to respond on their end

Yes, insurers may point to compliance or fraud prevention as reasons for these processes. But make no mistake: sludge is often a strategic operating tactic designed to reduce payouts.

It works because sludge shifts the emotional and cognitive load onto the claimant. If you have ever navigated a denied health procedure or tried to get reimbursement for a legitimate repair, you know how exhausting it is. Sludge thrives on fatigue. It turns your attention, your time, and your patience into insurance company profits.

That is why at Personal Finance Reimagined, we promote self-insurance for small and moderate risks. It not only reduces costs and builds discipline, it keeps you out of a system that profits from your inaction. De-moral hazarding is not just about optimizing your insurance strategy—it is about exiting a game that was not designed for you to win.

Yes, you should still insure against catastrophic, non-ergodic losses—the kind that could lead to financial ruin. But for everything else, your goal should be to expose yourself as little as possible to the insurance ecosystem. For more on how to distinguish between manageable risk and ruin, see the appendix on ergodicity and its physics cousin, entropy.

Buy what you hope never to use—and only when you truly cannot afford not to.

Moral Hazard: When Insurance Encourages Bad Behavior

Moral hazard is a classic concept in economics. It describes what happens when people take on more risk because they are shielded from the consequences. Moral hazard describes human behavior that you have the power to control. Unfortunately, many do not.

In insurance, this is common. Consider the price difference between low-deductible and high-deductible policies.

A $250 deductible health plan is much more expensive than a $2,500 deductible plan. Why? Because with a low deductible, people are more likely to overconsume care—they are not spending their own money, so they care less about cost. Insurers anticipate this behavior and raise premiums to cover it. Also, the overconsumed care is often not care designed for long-term health. Today's medical practices increasingly encourage short-term procedures that may solve today's symptom but are not necessarily designed to encourage long-term health. A lose-lose for sure. Paying more for lower long-term health.

Subsidized employer health insurance often functions like a low-deductible plan—it shields employees from upfront costs and amplifies moral hazard. It incentivizes care that supports short-term productivity over lasting well-being. Employers, too, have incentives that prioritize short-term productivity over long-term wellness. Subsidized health insurance keeps workers on the job to meet quarterly goals, but sustained health is ultimately the responsibility of the employee. Just as pensions have shifted to portable, self-managed 401(k) plans, the future of healthcare must empower individuals to own their long-term well-being.

That’s moral hazard at work. The important point is that moral hazards caused by low deductibles increase premium costs proportionally more than their high deductible cousins. The relationship is non-linear. At PFR, the great benefits of compound interest are taught through the lens of convexity—where small, intentional investments made today yield disproportionately large returns in the future. Think of it as planting seeds that multiply over time. Moral hazard, by contrast, reflects its not-so-good opposite cousin: concavity. Concavity is when you enjoy short-term benefits today without making meaningful investments, only to face increasingly negative outcomes down the road. It feels good now, but the long-term curve bends against you.

Pay me now or Pay me later

Compound interest is convex

Moral hazard is concave

The Strategy of De-Moral Hazarding

Now imagine doing the opposite. Imagine deliberately avoiding moral hazard by assuming more responsibility for small, manageable risks. That’s what we call de-moral hazarding, and we teach this concept to both our clients and students. It has two big payoffs:

1. Financial Efficiency: Higher deductibles mean lower premiums. If you are disciplined, the money you save can be set aside in a self-insurance fund. Over time, that fund grows—earning interest, building flexibility, and putting you in a stronger financial position than if you handed it to an insurer. Via my book, Making Choices, Making Money, this is the purpose of the savings waterfall and the cash quadrant of the Investment Barbell Strategy (IBS). When your self-insurance funds exceed your immediate liquidity requirements, they can be invested to generate wealth for you, rather than for your insurance company. This is the IBS in action!

2. Behavioral Benefit: When you know you are responsible for the first few thousand dollars of any loss, you behave differently. You drive more cautiously. You exercise more regularly. You eat healthier. Why? Because you have skin in the game. And skin in the game improves both outcomes and mindset. This method aids in living a long, healthy life with reduced involvement in medical procedures and higher decision agency because you are the steward of your own wealth. Once you start strategically exposing yourself to manageable risk and build your wealth by investing the savings, you build both wealth and confidence - it is a self-reinforcing, positive behavioral cycle.

   
   

De-Moral Hazarding in Action: Practical Everyday Wins

First, consider your health insurance options.

Take a high-deductible health insurance policy with a $5,000 annual deductible. Pair that with a Health Savings Account (HSA). You now have coverage for catastrophic events—major illnesses or surgeries—but you are on the hook for smaller claims. That risk motivates better lifestyle choices, like eating well and avoiding preventable conditions. Taking a higher chance of small losses focuses the mind. You pay attention to your healthy behaviors.

This is exactly where de-moral hazarding comes into play: by deliberately choosing to carry small, manageable risks, you reduce premiums, gain behavioral discipline, and avoid the traps of moral hazard. You own the outcomes—and that ownership reinforces better habits.

Meanwhile, your premiums are dramatically lower. You invest the savings in your HSA, where it grows tax-free and can be used later for health care or even retirement. Within a few years, your self-insurance fund can be substantial. More importantly, you have aligned your financial incentives with your personal well-being. That’s the ultimate win-win.

As a bonus, using a high-deductible plan outside your employer gives you the added benefit of health care portability, making job changes less financially risky. Some employers now offer Health Reimbursement Accounts (HRAs), which allow them to contribute tax-advantaged dollars to your health care while maintaining portability. This decouples insurance from employment and puts long-term control back in your hands.

Now consider a second example: buying insurance for a cracked iPhone screen.

This is a clear example where the cost to insure must be higher than the actual probability of screen damage. You are better off self-insuring. The de-moral hazarding effect here is that choosing to self-insure heightens your awareness—because you do not want to pay out-of-pocket for an easily preventable mishap. You might also take a low-cost step like applying a screen protector or using a sturdy case. That does not guarantee your phone will never crack. Sometimes, unlucky happens. But the difference is: instead of paying monthly fees to cover something unlikely, you’ve kept that money in a self-insurance fund. You remain financially prepared without surrendering control or overpaying for risk.

Now apply the same mindset to short-term property rentals—say, booking a house on Airbnb or Vrbo.

You are often offered the choice between paying a refundable security deposit or a non-refundable loss waiver insurance fee. Loss waiver insurance is a renter insurance policy with a $0 deductible, which results in moral hazard. De-moral hazarding encourages you to choose the deposit. Why? Because most people are what we call property respectors—they treat the place like it’s their own. If you fall into that group, you are far more likely to receive your full deposit back. In contrast, paying a loss waiver fee means you are subsidizing the behavior of property mistreators—renters who may be careless because they have no financial skin in the game.

From a behavioral standpoint, the deposit sharpens your focus—not by forcing you to act differently, but by affirming who you already are: someone who’s naturally careful, respectful, and inclined to leave things better than you found them. It also aligns your incentives with the property owner, who wants tenants who preserve the home’s quality. Importantly, this approach does not create more work for you—it simply allows you to retain the value of being who you already are: a solid citizen who cares. Unfortunately, many platforms like Vacasa only offer loss waivers because they are easier to administer. Additionally, the third-party insurer offers Vacasa a sales commission. That efficiency and revenue come at the cost of increased wear and tear, reduced accountability, and higher owner expenses over time. Loss waivers tend to attract property mistreators—those who see a small fee as a license to opt out of personal responsibility. Higher expenses for the owner lead to fewer choices and higher costs for the renter.

Whenever possible, choose the refundable deposit over the loss waiver. It reflects confidence in your behavior, keeps your money in your pocket, and supports a better system for both renters and owners.

Wealth and Health Are Built the Same Way: Through Ownership

The psychology here is powerful. We value what we own. When you own the risk of small losses, you act to prevent them. And as you prevent them, your savings compound—financially and behaviorally.

But this only works if you start. Too often, people transfer their wealth to insurance companies through unnecessary coverage and low deductibles, all in the name of safety. What they lose is autonomy, investment capital, and motivation.

De-moral hazarding flips that script. It says:

• Cover major risks that could cause financial ruin.

• Self-insure the rest.

This strategy transforms you from a passive policyholder into an active steward of your financial and physical well-being.

Final Thought

Insurers make their money off your fear of small losses. But you do not have to play their game. De-moral hazarding is a mindset—an intentional decision to own risk, live intentionally, and build wealth on your own terms.

Once your self-insurance fund starts growing, you will wonder why you ever outsourced your discipline to a company that profits from your hesitation.

Start today. Own your risk. Own your future.

Want to Go Deeper? Try These ChatGPT Prompts

To better understand how to navigate insurance decisions with clarity and confidence, here are prompts you can ask ChatGPT to continue your learning:

1. “How can I compare health, home, and auto insurance policies based on coverage, cost, and risk?” Explore structured ways to evaluate policies side by side.

2. “What are the key economic levers that affect insurance pricing—like deductibles, copays, and limits?” Understand how insurers price risk and what trade-offs affect your premiums.

3. “How do I know if I am overinsured or underinsured for my situation?” Learn how to match your insurance strategy to your actual risk profile.

4. “What are smart ways to build a self-insurance fund and reduce reliance on traditional insurance?” Get actionable steps for transitioning from coverage to control.

5. “What are the best places to shop for insurance (health, home, auto, or life) based on price transparency, customer service, and policy flexibility?” Discover which providers or platforms align with your values and financial goals.

These prompts are great for use in classrooms, family discussions, or personal planning sessions. They reflect the same decision-first approach we teach at Personal Finance Reimagined—empowering you to become a more informed, intentional risk manager.

Appendix: Entropy, Ergodicity, and the Risk of Ruin: Why It Matters for Smart Decision-Making

In personal finance, not all risks are created equal. Some losses are inconvenient. Others are irreversible. To navigate this difference wisely, we must turn to two powerful concepts from physics and probability: entropy and ergodicity.

Entropy: The Natural Drift Toward Disorder

Entropy, in thermodynamics, is the measure of disorder or randomness in a system. Left alone, systems tend to become more chaotic over time—a principle that applies just as well to finances. Without intentional planning, your financial life will not automatically become more secure; it will drift toward disarray. That drift—unplanned expenses, poor habits, lack of reserves—is the background noise of everyday risk. It is inevitable, but manageable.

Ergodicity: The Key to Understanding Risk and Ruin

Now consider ergodicity, a concept from probability theory that helps us evaluate whether a system’s long-term average outcomes match its short-term experiences. Here's the key insight:

Ergodic risks are repeatable, recoverable, and manageable over time.

Example: Paying a $500 car repair from your emergency fund. Annoying, but not life-changing.

Non-ergodic risks are those that involve absorbing states—one-time events from which you cannot recover financially.

Example: A catastrophic health event without insurance, or a bankruptcy-inducing lawsuit.

A non-ergodic event leads to ruin—not just disorder, but permanent collapse. Once you're in an absorbing state, the game is over. No amount of time or average recovery will bring you back.

Strategic Implication: Insure Against Ruin, Not Everyday Disorder

This is where de-moral hazarding comes into play. You do want insurance—just not for every entropic inconvenience. Smart risk management means:

Self-insuring ergodic risks by saving and building reserves. These are the bumps in the road you can handle with discipline.

Transferring non-ergodic risks—the truly ruinous scenarios—to an insurer. These are the one-time events that justify premiums.

Bottom Line

Entropy guarantees that life will throw curveballs. Ergodicity tells us which ones we can survive—and which ones we cannot. De-moral hazarding is the practical response: protect against financial collapse, but do not outsource every small risk. Doing so keeps your wealth intact, your incentives aligned, and your future in your own hands.

Resources for the Curious

• Hulett, Jeff. Making Choices, Making Money: Your Guide to Making Confident Financial Decisions. The Curiosity Vine Press, 2023. Summary: Introduces a structured approach to personal finance decisions, including the Savings Waterfall and the Investment Barbell Strategy. Emphasizes behavioral discipline and long-term thinking.

• Hulett, Jeff. “The Regenerative Life: How to Be an Ergodic Pathfinder.” The Curiosity Vine, July 22, 2023. Updated August 26, 2023. Summary: Explores how entropy and ergodicity influence personal risk. Offers a framework for navigating uncertainty with resilience and intentionality.

• Hulett, Jeff. “Getting the Most of Your Health AND Your Wealth.” Personal Finance Reimagined YouTube Channel: @jeffhulett, July 2023. Summary: Demonstrates how high-deductible health plans and behavioral economics principles support long-term wealth and wellness. Introduces de-moral hazarding as a strategy for aligned incentives.

• Taleb, Nassim Nicholas. Skin in the Game: Hidden Asymmetries in Daily Life. Random House, 2018. Summary: Argues that systems function better when decision-makers bear the consequences of their actions. Introduces risk asymmetry and reinforces why self-insurance builds integrity and resilience.

• Dellanna, Luca. Ergodicity: Definition, Examples, and Implications, As Simple As Possible. Independently published, 2020. Summary: Provides an accessible introduction to ergodicity with real-life applications across investing, health, and systems thinking. Supports the rationale for managing risk based on time exposure.

• Wiggins, Joe. “We Need to Talk About Ergodicity.” Behavioural Investment, May 2020. Summary: Challenges classical economic assumptions by introducing ergodicity. Argues that decisions should be evaluated through time-based outcomes, not averages across groups.

• Attia, Peter, with Bill Gifford. Outlive: The Science and Art of Longevity. Harmony Books, 2023. Summary: Challenges the reactive nature of conventional medicine and advocates for a proactive, long-term approach to healthspan optimization. Emphasizes that treating symptoms is not the same as preventing disease—underscoring the need for forward-looking, patient-owned care strategies.

• Insurance Information Institute. “How Insurance Works.” III.org, 2022. Summary: Outlines the fundamentals of pooled risk, underwriting, and claims management in the insurance industry. Useful context for understanding insurer incentives.

• Reuters Staff. “U.S. Lawsuit Accuses Health Insurer of Systemic Claim Denials.” Reuters, April 15, 2023. Summary: Highlights real-world examples of claim denial practices in health insurance. Underscores the conflict between insurer incentives and consumer expectations.

• The Verge. “Auto Insurers Use AI to Undervalue Vehicles, Class Action Alleges.” The Verge, March 29, 2023. Summary: Investigates how AI-driven valuation practices may contribute to moral hazard on the supply side, reducing payouts to policyholders after accidents.

• Kahneman, Daniel. Thinking, Fast and Slow. Farrar, Straus and Giroux, 2011. Summary: Introduces dual-system thinking and cognitive biases. Helps explain why consumers overinsure due to loss aversion and misperceptions of risk.