Question 1

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

Accepted Answer

American International Group, Inc. (AIG)

Question 2

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

Accepted Answer

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

Question 3

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.

Accepted Answer

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

Question 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

Distinguish between different types of life insurance.

Accepted Answer

There are several different types of lif

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

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

Question 10

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

Accepted Answer

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. 
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 11

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

Accepted Answer

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

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 ________.

Accepted Answer

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

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

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. 
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 16

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

Accepted Answer

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. 
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 17

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

Accepted Answer

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

Question 18

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

Accepted Answer

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 
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 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 21: Insurance Companies and Pension Funds

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

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

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.

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

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

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

Distinguish between different types of life insurance.

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

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

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

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

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

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 ________.

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

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

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

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

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

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

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

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

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 .