Introduction to Risk Management and Insurance, 10e (Dorfman/Cather)
Chapter 9 Insurance Markets: Economics and Issues
1) The text suggests that insurance consumers should:
A) inform themselves about the company, policy, etc. to protect their own self-interest
B) rely on government regulation to protect their interest, since insurance companies and policies
cannot be understood by the public
C) rely on attorneys and the lawsuit process to protect themselves
D) rely on self-regulation of insurance companies and the insurer’s goodwill to protect their
interest
2) All of the following are rights of insurance consumers except:
A) the right to accurate information
B) the right to have complaints heard
C) the right to affordable prices
D) the right to product development and improvement
3) All the following are true concerning FAIR (Fair Access to Insurance Requirements) plans
except:
A) they are one possible solution to the insurance availability problem
B) they are found in only four states
C) they are designed to deal with unavailability of property insurance
D) they have not been profitable in most states most years
4) The A.M. Best Company can help you to determine which of the following about your
insurer?
A) Its reputation for settling claims
B) Its customer service rating
C) How many complaints have been filed against it
D) Its financial strength rating
5) Which of the following is a primary reason that insurance consumers are not well-informed?
A) Insurers have not made much effort to inform consumers.
B) The rewards of making informed decisions are not worth the cost of obtaining the needed
information.
C) State insurance regulators do not provide the needed information.
D) Insurance prices are so low that most consumers do not care to be informed.
6) Which of the following Latin terms means “to stand by decisions,” and conveys the idea that
court decisions set precedents?
A) res ipsa loquitor
B) stare decisis
C) ab initio
D) in hoc stare
7) Mr. Murray has asked you to help him choose an insurance company. Which of the following
criteria would you not recommend that he take into consideration?
A) Insurer’s financial strength
B) Insurer’s claims service
C) Insurer’s service both before and after a loss
D) The recommendation of at least two different insurance agents
8) The individual consumer must ultimately deal with several issues to make an efficient
purchase in the insurance market. Which of the following generally should not be a major
consideration?
A) The type of policy covering the exposure(s)
B) The maximum amount of insurance coverage
C) The commission the agent will receive from the sale
D) The insurance agent’s expertise
9) All the following are requirements for perfect competition except:
A) a well-established regulatory environment
B) numerous sellers, each holding a small market share
C) numerous well-informed consumers
D) a homogeneous, perfectly substitutable product
10) The efficient insurance market requires all of the following conditions except:
A) numerous sellers and buyers
B) well-informed consumers
C) numerous purchase substitutes (homogeneity)
D) a government subsidy for lower-income citizens
11) In choosing an insurance company, the most important factor is:
A) how many dollars it pays for claims
B) the amount of liquid assets the insurer has
C) its financial strength
D) the state in which it is domiciled
12) Given the following choices, the best advice for purchasing automobile insurance is:
A) always buy full coverage
B) always buy the cheapest policy
C) choose the largest deductible you can reasonably afford
D) never buy auto insurance from a stock company
13) Which of the following is true about the supply and demand curves for insurance?
A) The demand for insurance is very elastic and sensitive to price.
B) As price declines, the demand for insurance increases dramatically.
C) The supply of insurance increases dramatically with a decrease in the price.
D) Insurers will tend to reduce supply if the price is artificially increased or decreased.
14) One of the reasons why there is not sufficient supply for high-risk insurance applicants is:
A) consumers will not buy insurance if prices are increased
B) the existence of joint underwriters associations
C) regulators have limited the premiums that insurers can charge for such customers
D) the number of insurance contracts written by an insurer is totally regulated
15) Choose the true statement.
A) FAIR plans were developed to provide insurance to automobile drivers when coverage is
otherwise unavailable.
B) FAIR plans are now found in all states.
C) FAIR plans require that each property owner that requests it, be given an inspection of his
property and an offer of insurance at an appropriate rate or written notice of improvements
needed before insurance can be offered.
D) In general, FAIR plans have shown underwriting gains in most states in most years.
16) All of the following firms provide financial ratings of insurance companies except:
A) A.M. Best
B) Standard & Poor’s
C) Moody’s
D) NASD
17) Prior to September 11, 2001, property insurance policies:
A) covered terrorism
B) excluded terrorism from coverage
C) covered war
D) were very expensive
18) Participants in the American insurance market include all of the following except:
A) insurance buyers
B) insurance companies
C) insurance regulators
D) the FDIC
19) In most states the insurance commissioner is:
A) republican
B) democrat
C) appointed
D) elected
20) Stare decisis means:
A) to stand by decisions
B) to stand for decisiveness
C) to let the thing speak for itself
D) to stare indecisively
21) CLU stands for:
A) Chartered Life Underwriter
B) Casualty Life Underwriter
C) Claims Litigation Underwriter
D) Chartered Legal Underwriter
22) CPCU stands for:
A) Certified Property and Casualty Underwriter
B) Claims, Property, and Casualty Underwriter
C) Chartered Property Casual Underwriter
D) Chartered Professional Claims Underwriter
23) CFP stands for:
A) Chartered Financial Planner
B) Certified Financial Planner
C) Casualty Finance Professional
D) Claims and Financial Planner
24) Most markets involve two parties. How many does the insurance market have?
A) 1
B) 2
C) 3
D) 4
25) Moody’s Investors Service provides what type of information about insurers?
A) Financial strength
B) Average time it takes them to pay valid claims
C) Daily stock price reports
D) Complaint history
26) David and Kathy have asked you about A.M. Best Reports services. They specifically want
to know if there are any criticisms of Best’s and other rating agencies. You would be correct if
you told them:
A) all the agencies tend to agree on the ratings for a given company, so it’s difficult to compare
them
B) ratings are merely estimates, and are no guarantee that the future of the insurer will remain the
same
C) it only takes one letter grade to sum up the condition of a company
D) the ratings firms have almost never made mistakes in their assessments of companies, so
they’re due to make one any time now
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27) When choosing the right amount of life insurance to purchase, the consumer should first
consider:
A) how much money she can afford for monthly premiums
B) her financial goals and reasons for buying it in the first place
C) how many assets she already owns
D) none of the above
28) Why is it more difficult to choose a good life insurance policy than to choose a good auto
insurance policy?
A) People don’t like thinking about death or dying, and thus cannot be objective in the selection
process.
B) Most people rarely need life insurance, while auto insurance is required by law.
C) Life insurance policies are not standardized, while many non-life policies are.
D) Both B and C are correct.
29) Which of the following statements about the insurance market is not correct?
A) Compulsory insurance laws make the insurance market more efficient.
B) The insurance market has many buyers and sellers.
C) Insurance companies do not hold constrictive rights to their clients.
D) The insurance market consist of buyers , sellers, and regulators.
30) Insurance companies that have funny TV commercials:
A) make the insurance market more efficient
B) attract more attention of regulators
C) waste money of the insured
D) make themselves less reputable
31) Insurance regulators:
A) make the insurance market more efficient
B) have been forced to intervene in the market periodically
C) assist consumers in choosing the right insurance company
32) A lack of insurance for high-risk drivers:
A) makes the insurance market more efficient
B) should change their behavior
C) makes insurance costs go up
D) reduces regulation in the insurance market
33) Which of the following is the best driver to maintain an adequate supply of insurance at
affordable prices?
A) Regulations
B) Excluding high-risk applicants
C) Excluding low-risk applicants
D) Competition among insurers
34) Which of the following statements about joint underwriting associations is correct?
A) All states have joint underwriting associations.
B) All those who want to get insurance can join.
C) Insurance companies charge the involuntary market losses to the voluntary market.
D) They provide assigned risk plans.
35) Why do regulators care whether high-risk drivers have insurance?
A) Regulators are silly and have nothing better to do.
B) Otherwise insurance companies would lose too much money.
C) Excluding high-risk drivers is a violation of the Constitution.
D) The societal costs associated with the accidents caused by high-risk drivers is at least
somewhat reduced by having them pay an insurance premium, even if it is too low for the
associate risk.
36) Which of the following insurance applicants have not had problems buying insurance in
recent years?
A) Politicians
B) Directors of Firms
C) Medical Doctors
D) Hospitals
37) Consumers that have done some research to gather insurance information:
A) make the insurance market less efficient
B) probably will get better subsequent information from insurance companies
C) probably will just get “razzle-dazzle” from insurance companies
D) probably wasted their time
38) When choosing the proper amount of insurance:
A) one should always insure those exposures that occur most frequently
B) one should always take a little bit less insurance than the agent recommends to save some
money in the long run
C) one should never expose more to loss than one can afford to lose
D) one should take the biggest deductible that is available
39) Which of the following statements about the numbers of buyers and sellers in the insurance
market is correct?
A) The market share of the four largest sellers is bigger than those found in other industries,
which are considered competitive.
B) The insurance market has a sufficient numbers of buyers, but not a sufficient number of
sellers.
C) The insurance market has a sufficient numbers of sellers, but not a sufficient number of
buyers.
D) The market share of the four largest sellers is comparable to those found in other industries,
which are considered competitive.
40) Which of the following statements about FAIR plans is correct?
A) The success of FAIR plans is unclear.
B) FAIR plans are a good solution to the problem of unavailability of property insurance.
C) FAIR plans show that the provision of property insurance by the private market is a success.
D) FAIR plans benefit property owners in the suburbs.
41) Which of the following statements about the courts is correct?
A) Courts mostly deal with insurance companies denying coverage.
B) Courts mostly deal with insurance companies not paying on legitimate claims.
C) Courts mostly deal with insurance companies not providing sufficient coverage.
D) Courts mostly deal with insurance companies not paying on fraudulent claims.
42) Which of the following is not a source of consumer protection in the insurance industry?
A) Insurance commissioners
B) Laws
C) Politicians
D) Courts
43) Which of the following statements about insurance laws is not correct?
A) Insurance laws are generally fairly flexible.
B) There are insurance laws that deal with fair prices for insurance.
C) There are insurance laws that deal with the solvency of insurance companies.
D) Insurance laws protect the rights of the insured.
44) Which of the following statements about insurance commissioners is not correct?
A) Insurance commissioners interpret the state’s insurance laws.
B) Insurance commissioners enforce the state’s insurance laws.
C) Insurance commissioners have limited powers when it comes to protecting the insured.
D) Every state has an insurance commissioner.
45) Insurance companies offer identical and perfectly substitutable products.
46) The insurance market’s structure has no major flaws.
47) Comparison shopping for insurance is generally not worthwhile since very little price
variation is found in either life or property insurance.
48) The main thrust of state insurance regulation with respect to the consumer has been to protect
consumers from abusive practices, and to protect them from insolvent insurers.
49) The lack of availability of life insurance is a serious problem in the U.S.
50) The text associates low cost insurance with a bargain.
51) Finding the lowest price is the first responsibility of the smart insurance consumer.
52) Automobile insurance plans, also known as assigned risk plans, are designed to give
discounts to good drivers who have had no insurance claims or motor vehicle tickets for at least
three years.
53) FAIR plans guarantee insurance to all applicants.
54) The role of the court is to promote the consumer’s interest, while the role of the insurance
commissioner is to promote the insurer’s interest.
55) Health care providers and officers of corporations have had trouble obtaining liability
insurance in recent years.
56) New York’s insurance law makes it illegal to make false statements or rumors about
insurance companies.
57) The insurance commissioner applies the state insurance code to regulate insurance
companies and their activities.
58) Explain briefly why increasing or decreasing price artificially can decrease the supply of
insurance.
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59) What is the purpose of an automobile insurance plan? How does an auto plan generally
work?
60) Briefly explain the role of the courts and the law in providing consumer protection relative to
insurance products.
61) When the consumer purchases insurance, several key decisions are made. What are these key