Exam 2: Insurance and Risk

Adverse selection occurs

Which of the following statements about the insurance industry as a source of investment funds is (are) true? I.These funds result in a lower cost of capital than would exist in the absence of insurance. II.These funds tend to promote economic growth and full employment.

Which of the following is a basic characteristic of insurance?

Methods by which insurers may minimize or avoid catastrophic losses include which of the following? I.The use of reinsurance II.Concentrating coverage written in one geographic region

ABC Insurance Company calculated the amount that it expected to pay in claims for each policy sold. Rather than selling the insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business, including commissions, taxes, and acquisition expenses. This allowance is called a(n)

Reasons why market, financial, and production risks are often uninsurable include which of the following? I.The potential to produce a catastrophic loss is great. II.The chance of loss cannot be accurately estimated.

The tendency for unhealthy people to seek life or health insurance at standard rates is an example of

Which of the following types of risks best meets the requirements for being insurable by private insurers?

Which of the following is a form of casualty insurance?

In addition to marketing life insurance, life insurers typically sell which of the following products? I.Retirement annuities II.Disability income insurance

Which of the following statements regarding private insurance and government insurance is (are) true? I.Private insurance programs include life and health insurance and property and liability insurance. II.Social insurance programs are government insurance programs that are voluntary and financed entirely by contributions from covered employers.

Inland marine insurance provides coverage for

A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that each farmer sustained. Which characteristic of insurance is embodied in this agreement?

Which of the following statements regarding insurance and gambling is (are) true? I.Insurance is used to handle existing pure risks, while gambling creates a new speculative risk. II.Insurance usually involves risk avoidance, while gambling typically involves only risk reduction.

An insurance company that sells earthquake insurance in an area where earthquakes are possible has subjected itself to the risk of insolvency if a severe earthquake occurs. An insurer can safely sell earthquake insurance in this area if it shifts the risk of catastrophic loss to another insurer. The shifting of insured risk from one insurer to another insurer is called

Which of the following statements regarding insurance and hedging is (are) true? I.Insurance involves the transfer of an insurable risk while hedging handles risk that is typically uninsurable. II.Insurance transactions can reduce objective risk, while hedging typically involves only risk transfer and not risk reduction.

Which of the following types of risks is normally uninsurable by private insurers?

Which of the following is a result of adverse selection?

One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called

LMN Insurance sells homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called