Chapter 12

Chapter 12 - Chapter 12 Exercise: . Key terms 1. annuity 2....

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Chapter 12 Exercise: . Key terms 1. annuity 2. Reinsurance 3. Vesting 4. a defined-benefit pension 5. fully funded 6. open-end funds 7. close-end funds 8. seasoned issues 9. initial public offering (IPO) . Multiple choice 1. Which of the following is true of life insurance companies? a. They hold long-term assets that are not particularly liquid. b. They hold short-term liquid assets. c. Payouts to policyholders are relatively predictable. d. Both (a) and (c) of the above. 2. Property and casualty insurance companies hold the largest share of their assets in a. long-term government bonds. b. short-term government securities and commercial paper. c. tax-exempt municipal bonds. d. medium-term corporate bonds. 3. 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. 4. 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. 5. Insurance companies’ attempts to minimize adverse selection and moral hazard explains 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 6. A deductible reduces __________ in exactly the same way as _________ a. moral hazard; risk-based premiums. b. adverse selection; restrictive provisions. c. moral hazard; cancellation of insurance. d. adverse selection; limits on the amount of insurance. e. moral hazard; coinsurance. 7. Life insurance companies face the problem of adverse selection when a. persons who have contracted AIDS attempt to purchase life insurance.
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b. life-long chain smokers attempt to purchase life insurance. c. school teachers attempt to purchase life insurance. d. school teachers attempt to purchase life insurance. e. only (a) and (b) of the above attempt to purchase life insurance. 8. The higher the insurance coverage, the _____ the policyholder can gain from risky activities that make an insurance payoff _____ likely. a. more; less b. more; more c. less; less d. less; more 9. The Employee Retirement Income Security Act (ERISA) established standards for pension plans, including a. rules for vesting. b. rules for the degree of underfunding.
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Chapter 12 - Chapter 12 Exercise: . Key terms 1. annuity 2....

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