Chapter 12 Nonbank Finance 1
Chapter 12
Nonbank Finance
Multiple Choice
1)The federal regulatory agency responsible for regulating the activities of life insurance companies is
(a)the FDIC.
(b)the Fed.
(c)the FHLBS.
(d)none of the above; there is no such federal regulatory agency.
Answer:
Question Status: Previous Edition
2)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.
Answer:
Question Status: Previous Edition
3)Life insurance companies are regulated by state governments because
(a)they have never experienced bankruptcy.
(b)they have never experienced profitability.
(c)they have never experienced widespread failures.
(d)they hold only highly liquid assets.
(e)they are insured by the federal government.
Question Status: New
4)The insurance industry’s share of total financial intermediary assets fell because of
(a)poor investment returns in the 1960s and 1970s.
(b)widespread failures of life insurance companies.
(c)federal regulations limiting the sale of life insurance.
(d)unpredictability of payouts.
(e)all of the above.
Answer:
Question Status: New
5)An example of permanent insurance is ______insurance, and an example of temporary insurance is _____ insurance.
(a)whole life; universal
(b)whole life; variable life
(c)whole life; term
(d)term; whole life
(e)term; variable life
Answer:
Question Status: New
6)A contract requiring payment of an annual premium in exchange for the payment of a future stream of payments beginning at a specified age and continuing until death is
(a)whole life insurance.
(b)an annuity.
(c)term life insurance.
(d)variable life insurance.
(e)universal life insurance.
Answer:
Question Status: New
7)The key factor causing life insurance companies to move into the management of pension funds was
(a)the investment expertise of insurance companies.
(b)a request for this change by managers of pension funds.
(c)a change in state laws.
(d)a change in federal legislation.
(e)all of the above.
Answer:
Question Status: New
8)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.
Answer:
Question Status: Previous Edition
9)Property and casualty insurance companies are organized
(a)both as stock and mutual companies.
(b)only as stock companies.
(c)only as mutual companies.
(d)primarily as cooperatives.
Answer:
Question Status: Previous Edition
10)Relative to life insurance companies, property and casualty insurance companies hold
(a)more liquid assets.
(b)more long-term government bonds.
(c)more commercial mortgages.
(d)fewer municipal bonds.
Answer:
Question Status: Previous Edition
11)Reinsurance
(a)allows insurance companies to reduce their risks of exposure by allocating a portion of the risk to another company in exchange for a portion of the premium.
(b)allows insurance companies to reduce their risks of exposure by allocating a portion of the risk to the insured in exchange for a rebate on the premium.
(c)allows the insured to reduce the premium by accepting a portion of the risk that would otherwise be allocated to the insurance company.
(d)is none of the above.
Answer:
Question Status: Previous Edition
12)Insurance companies reduce risk exposure in exchange for a portion of their insurance premiums by obtaining
(a)government loan guarantees.
(b) federal insurance.
(c)reinsurance.
(d)all of the above.
(e)both (a) and (c) of the above.
Answer:
Question Status: New
13)The specialty of Lloyd’s of London is
(a)annuities.
(b) hedge funds.
(c)mutual funds.
(d)underwriting.
(e)reinsurance.
Answer:
Question Status: Study Guide
14)In recent years, bank regulatory authorities have
(a)encouraged banks to enter the insurance field.
(b)discouraged banks to enter the insurance field.
(c)asked Congress to write new legislation that would make it illegal for banks to enter the insurance field.
(d)asked Congress to write new legislation that would make it legal for banks to enter the insurance field.
Answer:
Question Status: Previous Edition
15)A Supreme Court ruling in March 1996 held that
(a)state laws to prevent banks from selling insurance can be superseded by federal rulings from banking regulators that allow banks to sell insurance.
(b)state laws to prevent banks from selling insurance cannot be superseded by federal rulings from banking regulators that allow banks to sell insurance.
(c)state laws to prevent banks from selling insurance can be superseded only if Congress enacts legislation that allow banks to sell insurance.
(d)state laws to prevent banks from selling insurance cannot be superseded by federal legislation.
Answer:
Question Status: Previous Edition
16)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.
Answer:
Question Status: Previous Edition
17)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.
Answer:
Question Status: Previous Edition
18)In the case of an insurance policy, _____ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff.
(a)moral hazard
(b)opportunism
(c)adverse selection
(d)shirking
Answer:
Question Status: Previous Edition
19)Adverse selection occurs when those _____ likely to get _____ insurance payoffs are the ones who want to purchase insurance the most.
(a)least; large
(b)least; small
(c)most; large
(d)most; small
Answer:
Question Status: Previous Edition
20)In the case of an insurance policy, _____ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; _____ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.
(a)moral hazard; insurance market discrimination
(b)moral hazard; insurance segregation
(c)moral hazard; adverse selection
(d)adverse selection; moral hazard
Answer:
Question Status: Previous Edition
21)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
Answer:
Question Status: Previous Edition
22)Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the following insurance practices?
(a)Collateral deposits
(b)Risk-based premiums
(c)Compensating balances
(d)All of the above
(e)Only (a) and (b) of the above
Answer:
Question Status: Previous Edition
23)Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the following insurance practices?
(a)Collection of information and screening of potential policyholders
(b)Risk-based premiums
(c)Restrictive provisions
(d)All of the above
(e)Only (a) and (b) of the above
Answer:
Question Status: Previous Edition
24)Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the following insurance practices?
(a)Gender-neutral premiums
(b)Flat-rate premiums
(c)Restrictive provisions
(d)All of the above
(e)Only (a) and (b) of the above
Answer:
Question Status: Previous Edition
25)Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the following insurance practices?
(a)Collection of information and screening of potential policyholders
(b)Risk-based premiums
(c)Cancellation of insurance
(d)All of the above
Answer:
Question Status: Previous Edition
26)Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the following insurance practices?
(a)Collection of information and screening of potential policyholders
(b)Risk-based premiums
(c)Deductibles and coinsurance
(d)All of the above
(e)Only (a) and (b) of the above
Answer:
Question Status: Previous Edition
27)To prevent adverse selection, health and life insurance companies
(a)sometimes charge higher premiums to people with certain pre-existing health conditions.
(b)require potential policyholders to submit medical records, and may refuse to sell policies to people with certain pre-existing health conditions.
(c)charge the same premiums to all policyholders.
(d)will do both (a) and (b) of the above.
Answer:
Question Status: Previous Edition
28)To prevent adverse selection, health and life insurance companies
(a)always charge the same premiums to people regardless of certain pre-existing health conditions.
(b)require potential policyholders to submit medical records, and may refuse to sell policies to people with certain pre-existing health conditions.
(c)charge the same premiums to all policyholders.
(d)will do both (a) and (b) of the above.
Answer:
Question Status: Previous Edition
29)To prevent the adverse selection of AIDS patients, health and life insurance companies
(a)refuse to grant policies to people living in New York City and Los Angeles.
(b)require potential policyholders to submit medical records, and may refuse to sell policies to people with AIDS.
(c)will do both (a) and (b) of the above.
(d)will do neither (a) nor (b) of the above.
Answer:
Question Status: Previous Edition
30)To prevent the moral hazard problem, insurance companies may write policies
(a)requiring that the insured experience a loss when a claim is made.
(b)containing provisions that discourage risky behavior.
(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.
Answer:
Question Status: Revised
31)To prevent the moral hazard problem, insurance companies may write policies
(a)that increase benefits when the insured engages in risky behavior.
(b)discourage the insured from engaging in risky behavior.
(c)that increase the amount of insurance when the insured engages in risky behavior.
(d)with only (a) and (c) of the above provisions.
Answer:
Question Status: Revised
32)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.
Answer:
Question Status: New
33)Coinsurance reduces moral hazard in exactly the same way as
(a)limits on insurance.
(b)risk-based premiums.
(c)deductibles.
(d)restrictive provisions.
(e)all of the above.
Answer:
Question Status: New
34)If automobile insurance companies were to be prevented from charging risk-based premiums, but could selectively screen potential policyholders, the likely effect would be to
(a)increase the number of young men obtaining insurance coverage relative to young women.
(b)decrease the number of young women obtaining insurance coverage relative to young men.
(c)decrease the number of young men obtaining insurance coverage relative to young women.
(d)both (a) and (b) of the above.
Answer:
Question Status: Previous Edition
35)The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of
(a)risk-based premiums.
(b)an attempt to minimize adverse selection.
(c)coinsurance.
(d)all of the above.
(e)only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
36)Charging risk-based insurance premiums is a time-honored principle of insurance management to reduce
(a)moral hazard.
(b)adverse selection.
(c)free riding.
(d)principal-agent problems.
(e)all of the above
Answer:
Question Status: Previous Edition
37)Insurance management tools that give policyholders incentives to avoid accidents insured against include:
(a)deductibles.
(b)risk-based premiums
(c)coinsurance.
(d)all of the above.
Answer:
Question Status: Previous Edition
38)Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide is an example of a
(a)restrictive provision.
(b)restrictive covenant.
(c)anti-fraud exclusion.
(d)risk-based deductible.
Answer:
Question Status: Previous Edition
39)When a life-long chain smoker attempts to purchase a life insurance policy,
(a)the life insurance company faces the problem of adverse selection.
(b)the smoker can expect to pay a much higher premium than a nonsmoker.
(c)the smoker is said to commit fraud.
(d)only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
40)When a life-long chain smoker attempts to purchase a life insurance policy,
(a)the life insurance company faces the problem of adverse selection.
(b)the smoker can expect to pay a much higher premium than a nonsmoker.
(c)there may be a limit on the amount of insurance provided.
(d)all of the above.
(e)only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
41)Life insurance companies face the problem of adverse selection when
(a)persons who have contracted AIDS attempt to purchase life insurance.
(b)life-long chain smokers attempt to purchase life insurance.
(c)school teachers attempt to purchase life insurance.
(d)all of the above attempt to purchase life insurance.
(e)only (a) and (b) of the above attempt to purchase life insurance.
Answer:
Question Status: Previous Edition
42)Because young males have a much higher rate of accidents on average than young females, automobile insurers will be likely to
(a)charge young males higher insurance premiums than young females, all else equal.
(b)encourage young males to purchase collision insurance policies with relatively high deductibles.
(c)encourage young females to purchase collision insurance policies with no deductibles.
(d)all of the above.
(e)only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
43)Because insurance companies cannot always screen good from bad risks, and because policyholders may behave in a manner that increases the likelihood of insurance payouts, they
(a)base premiums on the risk classification of the policyholder.
(b)hire investigators to uncover fraudulent claims.
(c)sometimes require that policyholders share part of the loss by paying deductibles and coinsurance.
(d)do all of the above.
(e)do only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
44)Because insurance companies cannot always screen good risks from bad, and because policyholders may behave in a manner that increases the likelihood of insurance payouts, insurance companies
(a)charge flat-rate premiums based on worse-case scenarios.
(b)hire investigators to uncover fraudulent claims.
(c)require that policyholders purchase all their insurance from just one company.
(d)do all of the above.
(e)do only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
45)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
Answer:
Question Status: Previous Edition
46)Between 1960 and 2002, pension funds’ share of total financial intermediary assets increased from _____ percent to _____ percent.
(a)5; 35
(b)10; 35
(c)10; 30
(d)5; 30
Answer:
Question Status: Revised
47)Vesting refers to
(a)the length of time an insurance company has been in business.
(b)the length of time that a person must be enrolled in a pension plan before being entitled to receive benefits.
(c)the length of time until a CD matures.
(d)the premium required under term insurance.
Answer:
Question Status: Previous Edition
48)A defined-benefit pension
(a)determines benefits by contributions and their earnings.
(b)fixes benefits in advance.
(c)links benefits to investment performance.
(d)all of the above.
(e)both (b) and (c) of the above.
Answer:
Question Status: New
49)A defined-defined contribution pension plan
(a)determines benefits by contributions and their earnings.
(b)fixes benefits in advance.
(c)may be underfunded.
(d)all of the above.
(e)both (a) and (c) of the above.
Answer:
Question Status: New
50)If a pension fund has sufficient contributions and earnings to pay benefits, it is said to be
(a)underfunded.
(b)vested.
(c)fully funded.
(d)both (a) and (b) of the above.
(e)both (b) and (c) of the above.
Answer:
Question Status: New
51)If a pension fund has insufficient contributions and earnings to pay benefits, it is said it be
(a)underfunded.
(b)vested.
(c)fully funded.
(d)both (a) and (b) of the above.
(e)both (b) and (c) of the above.
Answer:
Question Status: New
52)Fraudulent practices and other abuses of private pension funds led Congress to enact the
(a)FDIC Act.
(b)Federal Reserve Act.
(c)FHLBS.
(d)Employee Retirement Income Security Act.
Answer:
Question Status: Previous Edition
53)The Employee Retirement Income Security Act (ERISA) was enacted because of
(a)mismanagement.
(b)fraudulent practices.
(c)underfunding.
(d)all of the above.
(e)both (a) and (c) of the above.
Answer:
Question Status: New
54)The Employee Retirement Income Security Act (ERISA) established standards for pension plans, including
(a)rules for vesting.
(b)rules for the degree of underfunding.
(c)restrictions on investment practices.
(d)all of the above.
(e)both (a) and (b) of the above.
Answer:
Question Status: New
55)The government corporation that insures pension benefits is
(a)Fannie Mae.
(b)Ginnie Mae.
(c)Freddie Mac.
(d)Sallie Mae.
(e)Penny Benny.
Answer:
Question Status: New
56)The Pension Benefit Guarantee Corporation performs a role similar to that of
(a)the Federal Reserve System.
(b)the Comptroller of the Currency.
(c)the FDIC.
(d)the Office of Thrift Supervision.
Answer:
Question Status: Previous Edition
57)Keough plans and IRAs are
(a)individual pension plans.
(b)government pension plans.
(c)corporate pension plans.
(d)public pension plans.
Answer:
Question Status: Previous Edition
58)Social Security is a
(a)fully funded pension plan.
(b)federally insured private pension plan.
(c)government sponsored private pension plan.
(d)“pay-as-you-go” system.
Answer:
Question Status: Previous Edition
59)The Social Security system is an example of a public pension plan that is
(a)underfunded.
(b)fully funded.
(c)overfunded.
(d)none of the above.
Answer:
Question Status: Previous Edition
60)Since social security benefits are paid from current contributions, the system is a