Financial Markets and Institutions, 8e (Mishkin)
1) The earliest form of insurance was ________ insurance.
A) life
B) health
C) automobile
D) property and casualty
2) 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.
3) 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
4) 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
5) 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.
6) 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
7) 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
8) 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
9) 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.
10) 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.
11) 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
12) 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
13) 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.
14) ________ 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
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.
16) 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
17) 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.
18) Which of the following types of life insurance provides no savings element?
A) Term
B) Whole
C) Universal
D) None of the above
19) 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.
20) 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
21) 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.
22) The largest share of life insurance companies’ assets are ________.
A) corporate stock
B) corporate bonds
C) government securities
D) cash reserves
23) 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.
24) 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.
25) 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
26) 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
27) 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
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) Cancellation of insurance
D) All of the above
29) 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
30) 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.
31) 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.
32) 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
33) 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
34) The fastest growing financial intermediary is ________.
A) commercial banks
B) pension plans
C) life insurance companies
D) mutual funds
35) 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
36) 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
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.
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