Easy Money

If the insured takes less care to prevent loss, the insurer might be subject to unanticipated loss because of such moral hazard.

Since the inception of the TV quiz show "Who wants to be a millionaire?" in the summer of 1999, ABC has given out $9.3 million prize money in 51 shows as of February 11, 2000.

The ABC TV network, however, did not have to pay the whole amount out of its budget. Instead, it took out an insurance coverage from Goshawk Syndicate, a British insurance underwriter. Under the coverage, Goshawk would pay any prize of at least $500,000 each after an annual deductible of $1.5 million with an annual cap of total claims at $5 million.

So far, there have been three $500,000 winners and two $1 million winners. In a similar British quiz show on which the ABC show is based, there has not been a top winner since its inception. The terms of the insurance coverage for the ABC show were apparently based on the British experience.

In view of the unexpected big payouts, Goshawk sued Buena Vista Entertainment Inc., the show’s producers, in British court trying to revise the insurance contract claiming that the producers have made the quizzes too easy.

Under the terms of the contract, there is little incentive for ABC not to be more generous once its annual deductible of $1.5 million is reached. In fact, since easier wins could draw more viewers and bigger advertising revenue, there is every incentive for ABC to dumb the quizzes down. There is no question that the ABC show has greatly improved the TV network's ratings. It regularly draws 30 million viewers a night and is run three times a week.

Whether Buena Vista Entertainment is guilty of dumbing down the show or not, the tendency for the insured to take less care to prevent loss is well-documented in insurance literature. Indeed, such behavior is commonly known as moral hazard. In some cases, moral hazard¹ might be so rampant and uncontainable that no insurer would underwrite any coverage for fear of open-ended loss.