Deck 25: Insurance and Pension Fund Operations

Question 1

Which type of life insurance policy can offer flexibility on the size and timing of premium payments? (The policyholder can decide the size of payments each period.)

A)whole life
B)term
C)universal life
D)decreasing term

Answer 1

C

Question 2

Under ____, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the policy.

A)whole life insurance
B)term insurance
C)variable life insurance
D)universal life insurance

Answer 2

C

Question 3

Because life insurance companies carry a large amount of ____ securities, the market value of their asset portfolio can be ____ to interest rate fluctuations.

A)short-term; insensitive
B)short-term; very sensitive
C)long-term; insensitive
D)long-term; very sensitive

Answer 3

D

Question 4

Which of the following statements is incorrect?

A)Insurance provides a payment to the insured under conditions specified by the insurance policy contract.
B)Individuals who are less exposed to specific conditions that cause financial damage are more likely to purchase insurance against those conditions.
C)Insurance can cause the insured to take more risks because they are protected.
D)Insurance companies employ underwriters to calculate the risk of specific insurance policies.

Question 5

Which of the following is not a ratio (or group of ratios) commonly used by insurance regulators to detect any problems in time to search for a remedy before the company deteriorates further?

A)liquidity ratios
B)operating expense ratios
C)profitability ratios
D)all of the above are used by regulators

Question 6

The most common use of funds for property and casualty insurance companies is

A)municipal securities.
B)Treasury bills.
C)corporate stock.
D)commercial paper.

Question 7

Which of the following is a difference in characteristics between life insurance companies and property and casualty insurance companies?

A)Property and casualty policies are longer term.
B)The type of policies offered by life insurance companies are less focused.
C)Future compensation amounts paid on property and casualty policies are more difficult to forecast.
D)Life insurance companies need to maintain a more liquid asset portfolio.

Question 8

____ represent the most popular asset of life insurance companies.

A)Corporate bonds
B)Treasury securities
C)Corporate stock
D)State and local bonds

Question 9

A ____ life insurance company is owned by its policyholders; most life insurance companies are ____.

A)stock-owned; mutual
B)mutual; mutual
C)stock-owned; stock-owned
D)mutual; stock-owned

Question 10

Life insurance companies can attempt to reduce their exposure to interest rate risk by

A)increasing their proportion of long-term assets.
B)diversifying the age distribution of their customer base.
C)increasing their proportion of short-term assets.
D)concentrating on an older age distribution of their customer base.

Question 11

The insurance premium is ____ related to the uncertainty about the size of the payments; the premium is also ____ for group plans.

A)higher; lower
B)higher; higher
C)lower; higher
D)lower; lower

Question 12

The ratio of an insurance company's net profit to policyholders' surplus is called

A)liquidity ratio.
B)return on net worth.
C)net underwriting margin.
D)return on assets.

Question 13

Which of the following is not a common use of funds by life insurance companies?

A)government securities
B)corporate bonds
C)stocks
D)commercial paper

Question 14

A life insurance policy that protects the policyholder until death, or as long as premiums are promptly paid is a

A)whole life policy.
B)term policy.
C)universal life policy.
D)B and C

Question 15

____ is not a typical source of funds to life insurance companies.

A)Deposit insurance premiums
B)Annuity plans
C)Investment income
D)Life and health insurance premiums

Question 16

Which type of life insurance policy specifies a limited period of time over which the policy will exist, and builds a cash value for policyholders over time?

A)whole life
B)term
C)universal life
D)decreasing term

Question 17

____ insurance provides insurance for a policyholder only over a specified period.

A)Term
B)Whole life
C)Universal
D)A and C

Question 18

Which type of life insurance policy does not build a cash value for policyholders?

A)whole life
B)term
C)universal life
D)all of the above build a cash value

Question 19

Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity.

A)less; less
B)more; more
C)less; more
D)none of the above

Question 20

Which type of life insurance policy specifically accommodates the needs of people who need more insurance now than later?

A)whole life
B)term
C)decreasing term
D)universal life

Question 21

In a(n) ____ insurance policy, the benefits awarded by the life insurance company to the beneficiary differ, depending on the assets backing the policy.

A)universal life
B)whole life
C)variable life
D)group life
E)none of the above

Question 22

The ____ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern.

A)Securities and Exchange Commission
B)Federal Deposit Insurance Corporation
C)National Association of Insurance Commissioners
D)National Association of Securities Dealers
E)none of the above

Question 23

____ effectively reallocates a portion of an insurance company's return and risk to other insurance companies.

A)Reinsurance
B)Cash flow underwriting
C)Factor insurance
D)Universal insurance

Question 24

Which of the following is not a difference between PC insurance and life insurance?

A)PC policies often last ten years or more, as opposed to the short-term life insurance policies.
B)PC insurance encompasses a wide variety of activities, while life insurance is more focused.
C)Forecasting the amount of future compensation to be paid is more difficult for PC insurance than for life insurance.
D)All of the above are differences between PC insurance and life insurance.

Question 25

____ insurance covers losses due to dishonest employees.

A)Key employee
B)Credit line
C)Malpractice
D)Fidelity bond

Question 26

A pension plan that provides benefits that are determined by the accumulated contributions and return on the fund's investment performance is called a ____ plan.

A)defined benefit
B)defined contribution
C)beneficiary
D)guarantor-insured

Question 27

Pension portfolios managed by trusts are expected to offer ____ returns than those managed by insurance companies and have a(n) ____ degree of risk.

A)lower; higher
B)lower; lower
C)the same; equal
D)higher; lower
E)higher; higher

Question 28

There are more defined ____ pension plans; there are more participants in defined ____ plans.

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

Question 29

The asset composition of private pension portfolios is most heavily concentrated in

A)corporate bonds.
B)mortgages.
C)common stock.
D)money market securities.

Question 30

A ____ plan allows a firm to know with certainty the amount of funds to contribute. The ____ plan allows a firm to know with certainty the amount of benefits that must be provided.

A)defined benefit; defined benefit
B)defined contribution; defined contribution
C)defined contribution; defined benefit
D)defined benefit; defined contribution

Question 31

All regulation of insurance companies is performed by

A)federal agencies.
B)the National Association of Insurance Commissioners.
C)the Insurance Regulatory Information System.
D)state agencies.

Question 32

If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a ____ strategy. When comparing matched funding and projective funding, ____ is more flexible for portfolio managers.

A)matched funding; matched funding
B)projective funding; matched funding
C)projective funding; projective funding
D)matched funding; projective funding

Question 33

Which of the following is not involved in the regulation of the insurance industry?

A)the National Association of Insurance Commissioners (NAIC)
B)the Insurance Regulatory Information System (IRIS)
C)the Federal Deposit Insurance Corporation (FDIC)
D)All of the above are involved in the regulation of the insurance industry.

Question 34

The most common type of mortgage held by life insurance companies are ____ mortgages.

A)commercial
B)residential
C)farm
D)none of the above

Question 35

____ usually require individuals to choose a primary care physician.

A)Indemnity plans
B)Health maintenance organizations
C)Preferred provider organizations
D)None of the above

Question 36

Pension funds whose contributions are dictated by the benefits that will eventually be provided are called ____ plans.

A)defined benefit
B)defined contribution
C)beneficiary
D)guarantor-insured

Question 37

____ insurance covers losses due to lawsuits by dissatisfied customers.

A)Fidelity bond
B)Credit line
C)Surety bond
D)Business interruption

Question 38

Life insurance companies can reduce their exposure to ____ risk by diversifying the age distribution of their customer base.

A)interest rate
B)market
C)credit
D)liquidity

Question 39

Pension funds managed by life insurance companies are normally referred to as

A)trust portfolios.
B)insured plans.
C)matched plans.
D)projective plans.

Question 40

Individuals who are insured under a managed health care plan can usually choose any provider of health care services.

Question 41

Real estate values usually have little impact on the market value of a life insurance company's asset portfolio, and only affect property and casualty insurance companies.

Question 42

A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance.

Question 43

Taking speculative positions in stock options is generally not considered appropriate for retirement funds because of the high degree of risk involved.

Question 44

The composition of the stocks in a pension fund's portfolio is determined by the fund's portfolio managers.

Question 45

Investing in a bond index portfolio is an example of a(n) ____ approach. Investing in an equity portfolio that mirrors the stock market is an example of a(n) ____ approach.

A)passive; active
B)active; active
C)active; passive
D)passive; passive

Question 46

Pension funds managed by life insurance companies concentrate on

A)common stock.
B)bonds and mortgages.
C)preferred stock.
D)money market instruments.

Question 47

Group insurance policies are very popular for employers and employees.

Question 48

To reduce interest rate risk, pension fund managers can

A)shift from variable-rate to fixed-rate bonds.
B)increase the average maturity on fixed-rate bonds.
C)decrease the average maturity on fixed-rate bonds.
D)reduce the investment in money market securities.

Question 49

Projective funding limits the manager's discretion, allowing only investments that match future payouts.

Question 50

The moral hazard problem as related to the insurance industry means that some people take more risks once they are insured.

Question 51

Property and casualty insurance and life insurance are similar in terms of the predictability of payouts to cover claims.

Question 52

Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.

Question 53

____ insurance protects the policyholders until death or as long as premiums are promptly paid.

A)Whole life
B)Variable life
C)Term life
D)Annuity life
E)None of the above

Question 54

Most pension fund contributions are contributed by the

A)employer.
B)employee.
C)state government.
D)federal government.
E)none of the above

Question 55

The adverse selection problem as related to the insurance industry means that people who have insurance are less likely to suffer losses than people who do not have insurance.

Question 56

Pension portfolios managed by trusts concentrate on

A)common stock.
B)bonds.
C)mortgages.
D)money market instruments.

Question 57

In recent years, defined-contribution plans have commonly been replaced by defined-benefit plans.

Question 58

Public pension funds can be classified by the manner in which contributions are received and benefits are paid.

Question 59

____ life insurance specifies a period of time over which the policy will exist but also builds a cash value for policyholders over time.

A)Whole
B)Variable
C)Term
D)Universal
E)None of the above

Question 60

The ____ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern.

A)Securities and Exchange Commission
B)Federal Deposit Insurance Corporation
C)National Association of Insurance Commissioners
D)National Association of Securities Dealers
E)none of the above

Question 61

The adverse selection problem in insurance occurs because:

A)those who are most likely to need insurance are also most likely to purchase it.
B)some insurance companies set their premiums too high, causing them to lose customers.
C)some insurance companies do not select investment that generate suffcient funds for the companies to pay insurance claims.
D)people who purchase insurance are less likely to engage in risky behavior.

Question 62

The problems that some state government agencies are experiencing with underfunded pension plans can be attributed to:

A)making unrealistic promises about pensions to employees in the past.
B)overestimating the return that the plans' investments would earn.
C)changing from defined-benefit plans to defined-contribution plans.
D)A and B

Question 63

In periods when the risk-free interest rate ____ substantially, the required rate of return by bondholders ____, and most bond portfolios managed by pension funds perform ____.

A)declines; declines; poorly
B)declines; increases; well
C)declines; declines; well
D)declines, increases; poorly
E)none of the above

Question 64

The primary source of life insurance company income is a result of

A)life insurance premiums.
B)annuity plans.
C)health insurance premiums.
D)investment income.
E)none of the above

Question 65

A pension fund manager might hedge against interest rate movements by selling bond futures contracts.

Question 66

With a(n) ____ plan, contributions are dictated by the benefits that will eventually be provided.

A)matched funding
B)projective funding
C)defined-benefit
D)defined-contribution
E)none of the above

Question 67

The practice of adapting insurance prices to interest rates by lowering premiums when interest rates rise and raising premiums when interest rates decline is called:

A)cyclical rate adjusting.
B)collateralizing premiums.
C)cash flow underwriting.
D)reinsurance.

Question 68

If a pension fund holds long-term, fixed-rate bonds, the market value of the portfolio will ____ during periods when interest rates ____.

A)increase; increase
B)decrease; increase
C)decrease; decrease
D)none of the above

Question 69

When long-term interest rates are very low, the future returns that a pension fund can earn on long-term low-risk bonds are __________ if the bonds are held to maturity; if the bonds are not held to maturity, there is ____________ potential for their prices to increase.

A)low; significant
B)low; not much
C)high; significant
D)high; not much

Question 70

Mortgage insurance protects:

A)homeowners against damage to their home such as from storms or fire.
B)homeowners in the event that they cannot make their mortgage payments.
C)the lender who provided the mortgage in the event that the homeowner defaults on the mortgage.
D)all of the above

Question 71

In a ____ strategy, investment decisions are made with the objective of generating cash flows that match planned outflow payments.

A)matched
B)mixed
C)projective
D)none of the above

Question 72

Pension portfolios managed by trusts offer potentially ____ returns than insured plans and have a ____ degree of risk.

A)higher; lower
B)higher; higher
C)lower; lower
D)lower; higher
E)none of the above

Question 73

Property and casualty (PC) insurance differs from life insurance in all of the following ways, except

A)PC policies often last one year or less, as opposed to the long-term or even permanent life insurance policies.
B)PC insurance is more focused than life insurance.
C)the amount of future compensation to be paid on PC insurance is more difficult to forecast than that paid on life insurance.
D)All of the above are differences between PC and life insurance.

Question 74

Underfunded pensions are primary a problem with defined-contribution pension plans.

Question 75

The government agency that guarantees that participants in defined-benefit plans will receive their benefits upon retirement is the:

A)Federal Pension Insurance Corporation.
B)Pension Benefit Guaranty Corporation.
C)Office of Pension Insurance.
D)Employee Pension Protection Bureau.

Question 76

A pension fund's bond portfolio is not directly affected by

A)general stock market conditions.
B)changes in the risk-free rate.
C)changes in the risk premium.
D)the abilities of the portfolio managers.
E)All of the above are factors affecting the performance of a pension fund's bond portfolio.