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Indicate whether the statement is true or false.
1. The moral hazard problem as related to the insurance industry means that some people take more risks once they are
insured.
a. True
b. False
2. Individuals who are insured under a managed health care plan can usually choose any provider of health care services.
a. True
b. False
3. Property and casualty insurance and life insurance are similar in terms of the predictability of payouts to cover claims.
a. True
b. False
4. Real estate values usually have little impact on the market value of a life insurance company’s asset portfolio and only
affect property and casualty insurance companies.
a. True
b. False
5. Bond insurance is available only for corporate bonds and not for municipal securities.
a. True
b. False
6. Group insurance policies are very popular for employers and employees.
a. True
b. False
7. Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.
a. True
b. False
8. Property and casualty (PC) insurance companies may use cash flow underwriting, in which they tend to lower their
premium prices as interest rates rise.
a. True
b. False
9. The adverse selection problem as related to the insurance industry means that people who have insurance are less likely
to suffer losses than people who do not have insurance.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
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10. Which of the following is NOT a characteristic commonly assessed by insurance regulators to detect any problems at
an insurance company?
a. liquidity of the asset portfolio
b. relative size of operating expenses
c. return on investment
d. All of these are assessed by regulators.
11. Life insurance companies can attempt to reduce their exposure to interest rate risk by
a. increasing their proportion of long-term assets.
b. diversifying the age distribution of their customer base.
c. increasing their proportion of short-term assets.
d. concentrating on an older age distribution of their customer base.
12. The ratio of an insurance company’s net profit to policyholders’ surplus is called the
a. liquidity ratio.
b. return on net worth.
c. net underwriting margin.
d. return on assets.
13. The practice of adapting insurance prices to interest rates by lowering premiums when interest rates rise and raising
premiums when interest rates decline is called
a. cyclical rate adjusting.
b. collateralizing premiums.
c. cash flow underwriting.
d. reinsurance.
14. ____ insurance provides insurance for a policyholder only over a specified period.
a. Term
b. Whole life
c. Universal
d. Term AND Universal
15. A ____ life insurance company is owned by its policyholders; most life insurance companies are ____.
a. stock-owned; mutual
b. mutual; mutual
c. stock-owned; stock-owned
d. mutual; stock-owned
16. ____ effectively reallocates a portion of an insurance company’s return and risk to other insurance companies.
a. Reinsurance
b. Cash flow underwriting
c. Factor insurance
d. Universal insurance
17. The ____ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern.
a. Securities and Exchange Commission
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b. Federal Deposit Insurance Corporation
c. National Association of Insurance Commissioners
d. National Association of Securities Dealers
e. None of these are correct.
18. Mortgage insurance protects
a. homeowners against damage to their home from storms, fire, or other hazards.
b. homeowners in the event that they cannot make their mortgage payments.
c. the lender who provided the mortgage in the event that the homeowner defaults on the mortgage.
d. All of these are correct.
19. ____ mortgages are the most common type of mortgage held by life insurance companies.
a. Commercial
b. Residential
c. Farm
d. None of these are correct.
20. Which type of life insurance policy can offer flexibility on the size and timing of premium payments?
a. whole life
b. term
c. universal life
d. decreasing term
21. Which type of life insurance policy does NOT build a cash value for policyholders?
a. whole life
b. term
c. universal life
d. All of these build a cash value.
22. ____ insurance covers losses due to dishonest employees.
a. Key employee
b. Credit line
c. Malpractice
d. Fidelity bond
23. Under ____, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the
policy.
a. whole life insurance
b. term insurance
c. variable life insurance
d. universal life insurance
24. Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity.
a. less; less
b. more; more
c. less; more
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d. None of these are correct.
25. _____ insurance provides a financial payout if specified employees of a business become disabled or die.
a. Best person
b. Employment liability
c. Key employee
d. Credit line
26. The most common use of funds for property and casualty insurance companies is for
a. corporate bonds and municipal securities.
b. Treasury bills.
c. corporate stock.
d. commercial paper.
27. ____ is(are) not a typical source of funds for life insurance companies.
a. Deposit insurance premiums
b. Annuity plans
c. Investment income
d. Life and health insurance premiums
28. Which of the following is a difference between life insurance companies and property and casualty insurance
companies?
a. Property and casualty policies are longer term.
b. The types of policies offered by life insurance companies are less focused.
c. Future compensation amounts to be paid on property and casualty policies are more difficult to forecast.
d. Life insurance companies need to maintain a more liquid asset portfolio.
29. ____ insurance covers losses due to a contract not being fulfilled.
a. Fidelity bond
b. Credit line
c. Surety bond
d. Business interruption
30. An insurance company’s liquidity is measured as
a. net profit minus losses.
b. premium income minus policy expenses.
c. invested assets divided by loss reserves and unearned premium reserves.
d. None of these are correct.
31. With a(n) ____ insurance policy, the benefits awarded by the life insurance company to the beneficiary differ,
depending on the assets backing the policy.
a. universal life
b. whole life
c. variable life
d. group life
e. None of these are correct.
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32. Which of the following statements is NOT correct?
a. Insurance provides a payment to the insured under conditions specified by the insurance policy contract.
b. Individuals who are less exposed to specific conditions that cause financial damage are more likely to purchase
insurance against those conditions.
c. Insurance can cause the insured to take more risks because they are protected.
d. Insurance companies employ underwriters to calculate the risk of specific insurance policies.
33. ____ are the most popular assets of life insurance companies.
a. Corporate debt securities and stocks
b. Treasury securities
c. Mortgages and mortgage-backed securities
d. State and local bonds
34. The largest single source of funds for a life insurance company is
a. life insurance premiums.
b. annuity plans.
c. health insurance premiums.
d. investment income.
e. None of these are correct.
35. Which of the following is NOT involved in the regulation of the insurance industry?
a. National Association of Insurance Commissioners (NAIC)
b. Insurance Regulatory Information System (IRIS)
c. Federal Deposit Insurance Corporation (FDIC)
d. All of these are involved in regulating the insurance industry.
36. Which type of life insurance policy specifically accommodates the needs of people who need more insurance now
than later?
a. whole life
b. term
c. decreasing term
d. universal life
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Answer Key
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chapter 25