What is the passage mainly about?

When people are shielded from the cost of their risks they take less care, so some consequence should stay with the decider. (Moral hazard is looser care under shielding; the remedy is to 'keep some of the consequence attached to the one who decides.')

What does insurance use to keep the insured feeling part of the loss?

A deductible (The text says 'Insurance uses a deductible, so the insured still feels part of the loss.')

The bank example suggests that a promise of rescue can:

Encourage the very recklessness it was meant to prevent. (A rescued bank 'has reason to gamble more,' so protection can 'produce the very recklessness it was meant to guard against.')

In 'can, perversely, produce the very recklessness,' the word "perversely" most nearly means:

in a way opposite to what was intended (Protection meant to reduce risk instead produces it - a backward, opposite-to-intent result.)

Moral Hazard: Level 4 Reading Comprehension Questions

When people are shielded from the consequences of their actions, they tend to act with less care. Economists call this moral hazard, and it appears wherever one party takes a risk while another bears the cost of it going wrong.

Insurance is the classic case. A person with generous theft insurance may lock their door a little less carefully, because the loss, if it comes, falls on the insurer rather than on them. The driver whose company pays for every repair has weaker reason to drive gently. None of this requires dishonesty. The incentive simply shifts: when the downside is someone else's problem, caution quietly loosens.

The effect scales up. A bank that expects to be rescued if its gambles fail has reason to gamble more, since it keeps the winnings but passes the losses to the rescuer. This is why a promise of protection can, perversely, produce the very recklessness it was meant to guard against. Safety, offered without limits, can manufacture danger.

The remedy is not to abolish protection, which does real good, but to keep some of the consequence attached to the one who decides. Insurance uses a deductible, so the insured still feels part of the loss. Loans require a stake, so the borrower shares the risk. The general principle is simple: those who make a risky choice should keep enough skin in the game that caution still pays.

Comprehension questions