Question 1

The higher the insurance coverage, the more the policyholder can gain from risky activities that make an insurance payoff less likely.

Accepted Answer

A) True 
 B)False  False

Question 2

A credit default swap, or CDS, is essentially

Accepted Answer

A) insurance against default on a financial instrument. 
B) a method for swapping credit agreements between banks. 
C) a method for companies in default to swap credit ratings. 
D) insurance against the default of a party in a swap agreement. 
A) insurance against default on a financial instrument. 
B) a method for swapping credit agreements between banks. 
C) a method for companies in default to swap credit ratings. 
D) insurance against the default of a party in a swap agreement. A

Question 3

Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?

Accepted Answer

A) gender-neutral premiums 
B) flat-rate premiums 
C) restrictive provisions 
D) all of the above 
E) only A and B of the above 
A) gender-neutral premiums 
B) flat-rate premiums 
C) restrictive provisions 
D) all of the above 
E) only A and B of the above C

Question 4

Which proposal for insuring that sufficient funds will be available to provide Social Security benefits to future retirees does the AARP find least objectionable?

Accepted Answer

A) Raise the maximum income cap on which workers and employers are taxed. 
B) Provide more generous annual cost of living increases. 
C) Privatize Social Security. 
D) Lower immigration restrictions to increase the number of workers paying into the Social Security system. 
A) Raise the maximum income cap on which workers and employers are taxed. 
B) Provide more generous annual cost of living increases. 
C) Privatize Social Security. 
D) Lower immigration restrictions to increase the number of workers paying into the Social Security system.

Question 5

What are the major differences between life insurance and property and casualty insurance?

Accepted Answer

Life insurance and property and casualty

Question 6

The Pension Benefit Guarantee Corporation performs a role similar to that of the Office of Thrift Supervision.

Accepted Answer

A) True 
 B)False

Question 7

In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.

Accepted Answer

A) moral hazard; insurance market discrimination 
B) moral hazard; insurance segregation 
C) moral hazard; adverse selection 
D) adverse selection; moral hazard 
A) moral hazard; insurance market discrimination 
B) moral hazard; insurance segregation 
C) moral hazard; adverse selection 
D) adverse selection; moral hazard

Question 8

Social Security is a

Accepted Answer

A) fully funded pension plan. 
B) federally insured private pension plan. 
C) government sponsored private pension plan. 
D) "pay-as-you-go" system. 
A) fully funded pension plan. 
B) federally insured private pension plan. 
C) government sponsored private pension plan. 
D) "pay-as-you-go" system.

Question 9

To prevent adverse selection, health and life insurance companies may do all the following except

Accepted Answer

A) charge higher premiums to people with certain preexisting health conditions. 
B) require potential policyholders to submit medical records. 
C) refuse to sell policies to people with certain pre-existing health conditions. 
D) charge the same premiums to all policyholders. 
A) charge higher premiums to people with certain preexisting health conditions. 
B) require potential policyholders to submit medical records. 
C) refuse to sell policies to people with certain pre-existing health conditions. 
D) charge the same premiums to all policyholders.

Question 10

Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?

Accepted Answer

A) requiring collateral for policies 
B) risk-based premiums 
C) compensating balances 
D) all of the above 
E) only A and B of the above 
A) requiring collateral for policies 
B) risk-based premiums 
C) compensating balances 
D) all of the above 
E) only A and B of the above

Question 11

The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of

Accepted Answer

A) risk-based premiums. 
B) an attempt to minimize adverse selection. 
C) coinsurance. 
D) all of the above. 
E) only A and B of the above. 
A) risk-based premiums. 
B) an attempt to minimize adverse selection. 
C) coinsurance. 
D) all of the above. 
E) only A and B of the above.

Question 12

Why will Social Security funding problems rise in the coming decades? Identify and evaluate the proposals that have been suggested to ease or reverse these problems.

Accepted Answer

Social Security funding problems are exp

Question 13

To prevent the moral hazard problem, health and life insurance companies may write policies

Accepted Answer

A) that increase benefits dramatically once the policyholder is discovered to have contracted an illness so that the patient can recover sooner. 
B) containing provisions which either reduce or eliminate benefits to persons who contract prespecified illnesses. 
C) boosting the amount the companies will pay health providers in the event that claims are submitted by policyholders. 
D) with only A and B of the above provisions. 
A) that increase benefits dramatically once the policyholder is discovered to have contracted an illness so that the patient can recover sooner. 
B) containing provisions which either reduce or eliminate benefits to persons who contract prespecified illnesses. 
C) boosting the amount the companies will pay health providers in the event that claims are submitted by policyholders. 
D) with only A and B of the above provisions.

Question 14

How did AIG, a trillion-dollar insurance giant, find itself on the brink of bankruptcy in 2008?

Accepted Answer

American International Group, Inc. (AIG)

Question 15

Adverse selection occurs when those most likely to get insurance payoffs are the ones who want to purchase the insurance the most.

Accepted Answer

A) True 
 B)False

Question 16

________ companies get a tax advantage; most new insurance companies organize as ________ companies.

Accepted Answer

A) Mutual insurance; mutual insurance 
B) Mutual insurance; stock 
C) Stock; stock 
D) Stock; mutual insurance 
A) Mutual insurance; mutual insurance 
B) Mutual insurance; stock 
C) Stock; stock 
D) Stock; mutual insurance

Question 17

Insurance companies employ underwriters

Accepted Answer

A) as an alternative to higher deductibles. 
B) to control the risky behavior of their policyholders. 
C) to control the risk incurred on their behalf by agents. 
D) to encourage the loyalty of exclusive agents. 
E) to maintain the independence of independent agents. 
A) as an alternative to higher deductibles. 
B) to control the risky behavior of their policyholders. 
C) to control the risk incurred on their behalf by agents. 
D) to encourage the loyalty of exclusive agents. 
E) to maintain the independence of independent agents.

Question 18

When a life-long chain smoker attempts to purchase a life insurance policy, the insurance company faces the problem of adverse selection.

Accepted Answer

A) True 
 B)False

Question 19

The Social Security system is an example of a public pension plan that is ________.

Accepted Answer

A) underfunded 
B) fully funded 
C) overfunded 
D) none of the above 
A) underfunded 
B) fully funded 
C) overfunded 
D) none of the above

Question 20

Social Security is a "pay-as-you-go" system.

Accepted Answer

A) True 
 B)False

Exam 21: Insurance Companies and Pension Funds

The higher the insurance coverage, the more the policyholder can gain from risky activities that make an insurance payoff less likely.

A credit default swap, or CDS, is essentially

Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?

Which proposal for insuring that sufficient funds will be available to provide Social Security benefits to future retirees does the AARP find least objectionable?

What are the major differences between life insurance and property and casualty insurance?

The Pension Benefit Guarantee Corporation performs a role similar to that of the Office of Thrift Supervision.

Social Security is a

To prevent adverse selection, health and life insurance companies may do all the following except

Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?

The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of

Why will Social Security funding problems rise in the coming decades? Identify and evaluate the proposals that have been suggested to ease or reverse these problems.

To prevent the moral hazard problem, health and life insurance companies may write policies

How did AIG, a trillion-dollar insurance giant, find itself on the brink of bankruptcy in 2008?

Adverse selection occurs when those most likely to get insurance payoffs are the ones who want to purchase the insurance the most.

________ companies get a tax advantage; most new insurance companies organize as ________ companies.

Insurance companies employ underwriters

When a life-long chain smoker attempts to purchase a life insurance policy, the insurance company faces the problem of adverse selection.

The Social Security system is an example of a public pension plan that is ________.

Social Security is a "pay-as-you-go" system.

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

companies get a tax advantage; most new insurance companies organize as companies.