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

When you carry risk, you carry wisdom.

Understanding the Insurance Business Model

Most people think of insurance as a safety net—and it is. But it is also a business, one that thrives on a fundamental mismatch between actual risk and perceived risk. Insurers make money by leveraging actuarial science to measure the true likelihood of loss and then charging policyholders a premium above that baseline. Why the markup?

Because insurers must pay for:

• Brick-and-mortar buildings and overhead

• Slick advertising campaigns and memorable jingles

• Legions of claims adjusters and customer service staff

• Commissions for insurance agents and brokers

That markup is how they stay profitable—and it is why premiums must - by definition - exceed the expected cost of the insured risk.

So, if you are capable of managing smaller risks you insure today, you are subsidizing someone else’s carelessness.

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.

That’s moral hazard at work. The important point is that moral hazards like low deductibles increase premium costs proportionally more than their high deductible cousins. The relationship is non-linear.

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

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.

   
   

Real-Life Example: The High-Deductible Health Plan

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.

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.

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.