Deck 21: Insurance Companies and Pension Funds

Question 1

Which is not a management practice for reducing the problems of adverse selection and moral hazard in insurance?

A)deductibles
B)restrictive provisions
C)coinsurance
D)reinsurance

Answer 1

reinsurance

Question 2

Insurance management tools that give policyholders incentives to avoid accidents insured against include ________.

A)deductibles
B)risk-based premiums
C)coinsurance
D)all of the above

Answer 2

all of the above

Question 3

A term life insurance policy provides

A)insurance benefits only.
B)savings benefits only.
C)both insurance and savings benefits.
D)none of the above.

Answer 3

insurance benefits only.

Question 4

The earliest form of insurance was ________ insurance.

A)life
B)health
C)automobile
D)property and casualty

Question 5

The problem of ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.

A)asymmetric information
B)moral hazard
C)adverse selection
D)fraudulent behavior

Question 6

Which of the following types of life insurance provides no savings element?

A)term
B)whole
C)universal
D)none of the above

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.

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

Question 8

Insurance companies employ underwriters

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 9

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

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 10

Which of the following do not help people during their retirement?

A)term life insurance
B)annuity
C)whole life insurance
D)universal life insurance

Question 11

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.

A)moral hazard
B)opportunism
C)adverse selection
D)shirking

Question 12

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

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 13

Of the following financial intermediaries, which holds the least liquid assets?

A)property and casualty insurance companies
B)life insurance companies
C)money market mutual funds
D)commercial banks

Question 14

When those most likely to produce the outcome insured against are the ones who purchase insurance, insurance companies are said to face the problem of ________.

A)fraudulent claims
B)moral hazard
C)adverse selection
D)pecuniary purchases

Question 15

(I)A majority of life insurance companies are organized as mutual companies. (II)State governments have the major responsibility for regulating insurance companies.

A)(I)is true, (II)false.
B)(I)is false, (II)true.
C)Both are true.
D)Both are false.

Question 16

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

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

Question 17

The certainty equivalent for risk-averse people who buy insurance is the

A)maximum loss they may sustain.
B)expected loss they may sustain.
C)insurance premium they pay.
D)profit the insurance company earns.

Question 18

Some automobile owners will drive faster knowing that they are covered by health and automobile insurance. This behavior creates the problem of ________.

A)fraudulent claims
B)moral hazard
C)adverse selection
D)pecuniary purchases

Question 19

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

A)for which premiums increase dramatically once the policyholder is discovered to have contracted an illness.
B)containing provisions which either reduce or eliminate benefits to persons who contract prespecified illnesses.
C)limiting the amount the companies will pay in the event that claims are submitted by policyholders.
D)with all of the above provisions.
E)with only A and B of the above provisions.

Question 20

Which of the following is true of life insurance companies?

A)They primarily hold long-term assets that are not particularly liquid.
B)They primarily hold short-term liquid assets.
C)Payouts to policyholders are relatively predictable.
D)Both A and C of the above are true.

Question 21

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

A)collection of information and screening of potential policyholders
B)risk-based premiums
C)cancellation of insurance
D)all of the above

Question 22

Which of the following is not a feature of the Terrorism Risk Insurance Act of 2002?

A)Losses that exceed $100 billion are not covered.
B)The law does not apply to acts of international terrorism when losses are less than $5 million.
C)Government pays 50 percent of losses in excess of $100 billion.
D)Government pays 90 percent of the losses.

Question 23

Which of the following is not a proposal for insuring that sufficient funds will be available to provide Social Security benefits to future retirees?

A)Raise the maximum income cap on which workers and employers are taxed.
B)Provide more generous annual cost of living increases.
C)Raise the minimum age for receiving benefits.
D)Reduce the amount of future benefits.

Question 24

Which of the following has not contributed to the growth of pension plans?

A)privatization of Social Security
B)urbanization
C)retirement at earlier ages
D)increases in life expectancy

Question 25

A company's pension plan promises employees a specific amount of income when they retire. However, the plan does not have the assets to meet these future obligations to employees. This plan represents a defined-________ plan that is ________.

A)benefit; underfunded
B)benefit; overfunded
C)contribution; underfunded
D)contribution; overfunded

Question 26

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

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

Question 27

The largest share of life insurance companies' assets are ________.

A)corporate stock
B)corporate bonds
C)government securities
D)cash reserves

Question 28

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

A)collection of information and screening of potential policyholders
B)risk-based premiums
C)deductibles and coinsurance
D)all of the above
E)only A and B of the above

Question 29

Relative to life insurance companies, property and casualty insurance companies hold

A)more liquid assets.
B)more long-term government bonds.
C)more commercial mortgages.
D)fewer municipal bonds.

Question 30

Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide are an example of a ________.

A)restrictive provision
B)restrictive covenant
C)anti-fraud exclusion
D)risk-based deductible

Question 31

The federal regulatory agency responsible for regulating the activities of life insurance companies is

A)the Federal Deposit Insurance Corporation.
B)the Federal Reserve.
C)the Federal Life Insurance Board.
D)none of the above; there is no such federal regulatory agency.

Question 32

Which of the following statements regarding the funding of Social Security is false?

A)In 2004, workers contributed 6.2% of their wages up to a maximum of $87,900.
B)Employers contribute an amount equal to the workers' contributions.
C)Interest, dividend, rent, and royalty income are also taxed to provide supplemental funds for Social Security.
D)Contributions exceeding the amounts paid to current Social Security recipients are invested in Treasury bonds to build up a Social Security trust fund.

Question 33

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

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 34

If automobile insurance companies were prevented from charging risk-based premiums, but could selectively screen potential policyholders, the likely effect would be to

A)increase the number of young men obtaining insurance coverage relative to young women.
B)decrease the number of young women obtaining insurance coverage relative to young men.
C)decrease the number of young men obtaining insurance coverage relative to young women.
D)do both A and B of the above.

Question 35

The fastest growing financial intermediary is ________.

A)commercial banks
B)pension plans
C)life insurance companies
D)mutual funds

Question 36

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

A)risk-assessment screening
B)risk-based premiums
C)restrictive provisions
D)all of the above
E)only A and B of the above

Question 37

Social Security is a

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

Question 38

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

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

Question 39

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

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 40

Insurance management tools that give policyholders incentives to avoid accidents insured against include ________.

A)deductibles
B)risk-based premiums
C)coinsurance
D)all of the above

Question 41

________ is an insurance product that will help if you live longer than you expect. For an initial fixed sum or stream of payments, the insurance company agrees to pay you a fixed amount for as long as you live.

A)Life insurance proper
B)Disability insurance
C)An annuity
D)Health insurance

Question 42

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

Question 43

A basic product of life insurance companies is ________.

A)disability insurance
B)annuities
C)health insurance
D)all of the above

Question 44

Which of the following pensions does not promise employees a specific retirement benefit?

A)defined-benefit plan
B)defined-contribution plan
C)overfunded plan
D)underfunded plan

Question 45

What insurance protects against liability for harm the insured may cause to others as a result of product failure or accidents?

A)property insurance
B)health insurance
C)life insurance
D)casualty insurance

Question 46

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

Question 47

The broad categories of life insurance products including which of the following?

A)term
B)whole life
C)universal life
D)all of the above

Question 48

Private pension plan assets are invested mainly in ________.

A)government securities
B)corporate bonds
C)stock
D)certificates of deposit

Question 49

A credit default swap, or CDS, is essentially

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.

Question 50

Vesting refers to the length of time that a person must be enrolled in a pension plan before being entitled to receive benefits.

Question 51

During the 2007-2009 financial crisis, state and local governments now found their interest costs rising. Which of the following were causes of this?

A)lower tax revenues because of the weaker economy
B)weakened value of monoline insurance guarantees on their debt
C)both A and B
D)none of the above

Question 52

Between 1995 and 2009, the amount of credit default swaps (CDSs)exploded, along with the marketing of securitized mortgages. By their peak in 2008, there were about ________ of CDSs outstanding.

A)$62 million
B)$62 billion
C)$6.2 trillion
D)$62 trillion

Question 53

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

Question 54

Privatization of Social Security

A)would transform the program from an unfunded pay-as-you-go system to a fully funded pension plan.
B)would mean that workers' current contributions to Social Security would no longer be available to pay benefits to current retirees.
C)receives less public support when the stock market declines.
D)all of the above
E)none of the above

Question 55

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

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 56

Which life insurance policy usually requires the insured to pay a level premium for the duration of the policy, and the overpayment accumulates as a cash value that can be borrowed by the insured at reasonable rates?

A)whole life
B)term
C)universal life
D)none of the above

Question 57

All insurance is subject to several basic principles, including all of the following except that

A)the insured must provide full and accurate information to the insurance company.
B)the insured is to profit as a result of insurance coverage.
C)the loss must be quantifiable.
D)there must be a relationship between the insured and the beneficiary.

Question 58

Fraudulent practices and other abuses of private pension funds led Congress to enact the ________.

A)Federal Deposit Insurance Corporation Act
B)Employee Retirement Income Security Act
C)Federal Reserve Act
D)Social Security Act

Question 59

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

Question 60

Keogh plans and IRAs are

A)individual pension plans.
B)government pension plans.
C)corporate pension plans.
D)public pension plans.

Question 61

The Social Security system is an example of a pension plan that is fully funded.

Question 62

Most private pension plans are insured by the Penny Benny, which pays benefits when a plan's sponsor goes bankrupt.

Question 63

Distinguish between different types of life insurance.

Question 64

Property and casualty insurance protects against losses from fire, theft, storm, explosion, and even neglect.

Question 65

A defined-contribution plan promises employees a specific amount of retirement income.

Question 66

Who has the strongest incentive to monitor the performance of individual pension plans such as Keoghs and IRAs? Explain.

Question 67

A whole life insurance policy pays a death benefit if the policyholder dies.

Question 68

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

Question 69

Why do life insurance companies and pension plans invest heavily in long-term assets?

Question 70

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

Question 71

Health maintenance organizations (HMOs)shift the risk from the provider to the insurance company.

Question 72

Casualty insurance can be provided in either named-peril policies or open-peril policies.

Question 73

A monoline insurance company is an insurance company which specialize in credit insurance alone.

Question 74

Why must insurance companies screen applicants so carefully?

Question 75

Describe how insurance companies try to reduce adverse selection and moral hazards.

Question 76

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.

Question 77

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

Question 78

Demographic trends and changes in retirement patterns suggest that Social Security funding problems will ease over the next few decades.

Question 79

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