Question 1

Risk is something we only face occasionally in our lives.

Accepted Answer

Risk is something we face in our everyday lives. We live in a world where uncertainty is around every corner, from a terrorist attack at a train station to an automobile accident on our way to work.

Question 2

You can insure against the possibility of financial risk of loss by buying casualty insurance.

Accepted Answer

You can insure against the possibility of financial risk of loss due to personal injury, automobile crashes, house fires, floods, and other types of risk by buying casualty insurance.

Question 3

The law of large numbers postulates that as a sample size grows, the mean of the sample will get further away from the mean of the total population.

Accepted Answer

The law of large numbers postulates that as a sample size grows, the mean of the sample will get closer to the mean of the total population. For example, if an insurance company is insuring a life against the probability of death, the more people who are insured, the higher the probability that the actual mean death rate will approximate the national mortality tables of life expectancy for men and women per age category.

Question 4

One of the most common types of insurance policies is disability insurance.

Accepted Answer

The most common types of insurance policies are health insurance, life insurance, and property and casualty insurance.

Question 5

All of the following are examples of risks EXCEPT when
A) terrorists bomb major cities.
B) a person gets stuck in traffic on the way to work.
C) a person's gas stove starts leaking gas into the house.
D) an identity thief steals a person's credit card information and uses it to buy big ticket items.
E) flooding occurs that totals a vehicle.

Accepted Answer

Risks include when terrorists bomb major cities, when a person's gas stove starts leaking gas into the house, and when an identity thief steals someone's credit card information and uses it to buy big ticket items. While getting stuck in traffic is not considered a risk, a parked car flooded by rising storm water is an example of a risk.

Question 6

All of the following are considered to be uninsurable risks EXCEPT
A) the economic risk of lost market share.
B) interest rate risk.
C) the political risk of investing in foreign countries.
D) currency fluctuations.
E) loss due to personal injury.

Accepted Answer

Risks that no insurance company will write a policy for are considered uninsurable risks. These include the risk of lost market share, currency fluctuations, interest rate risk, and the political risk of investing in a foreign country.

Question 7

Molly invests in stocks and bonds, which have the possibility of a gain or a loss. What can be used to cover her possible losses from fluctuating prices?
A) a financial derivative
B) an insurance policy
C) a government promise
D) a speculative contract
E) an insurance option

Accepted Answer

Although insurance companies do not cover losses on a speculative investment, Molly can use a product called a financial derivative, such as options and futures contracts, to cover possible losses from fluctuating prices. When used properly, an investor can hedge (offset) either all or some of the losses by using these financial derivatives.

Question 8

Taking more risk means potential for
A) higher returns and no losses.
B) lower returns and higher losses.
C) higher returns and losses.
D) lower returns and losses.
E) higher returns and lower losses.

Accepted Answer

Financial theory would say that in order to induce most people to take larger risks, there must be an increased possibility for return. However, taking more risk means that not only do you have the potential for higher returns, you also have the potential for higher losses.

Question 9

Allister's Auto Insurance Company adjusts its rates on automobile insurance annually. The price of the company's policies reflects all of the following EXCEPT the
A) perceived danger of driving.
B) previous year's accidents.
C) replacement value of the automobile.
D) driver's driving record.
E) age of the automobile.

Accepted Answer

Insurance companies, like Allister's, annually adjust their rates on automobile insurance in every state to reflect the previous year's accident experience. The price of the policy also reflects the age of the automobile, the replacement value of the automobile, and the driver's driving record.

Question 10

Why do insurance companies like to insure many people?
A) the law of actuaries
B) the law of risk taking
C) the risk-return trade-off
D) the law of large numbers
E) risk aversion theory

Accepted Answer

The law of large numbers gives us an idea as to why insurance companies like to insure a large number of people. The larger the number of lives, houses, cars, boats, and so on that the companies insure, the more closely the claims from losses will be predictable based on a normal statistical distribution. This allows insurance companies to price policies for life insurance and casualty insurance appropriately so they have a predictable return on their assets.

Question 11

Which statement is true regarding the reserves kept by insurance companies?
A) They take several weeks to sell and convert to cash.
B) They are usually not enough to cover unexpected losses.
C) They are kept in financial assets such as stocks, bonds, and U.S. government securities.
D) They are more likely to be in the form of stocks when invested by life insurance companies.
E) They are more likely to be in the form of bonds when invested by property casualty insurance companies.

Accepted Answer

Because they have guaranteed payment, insurance companies need reserves to cover unexpected losses. Reserves are kept in financial assets such as stocks, bonds, and U.S. government securities. These assets are liquid, meaning they can be sold quickly and turned into cash within a few days. Life insurance companies tend to invest more conservatively with a larger percentage of their assets invested in bonds, whereas property casualty companies tend to have a larger percentage of stocks than life insurance companies.

Question 12

All of the following are true regarding life insurance policies EXCEPT
A) you can name anyone as your beneficiary or even have multiple beneficiaries.
B) beneficiaries must be people.
C) people often buy these policies to leave money to cover debts they want paid.
D) some companies provide these policies as part of their employment contract.
E) these policies can be purchased for $10,000 or millions of dollars, depending on how much you want your beneficiary to receive.

Accepted Answer

A life insurance policy guarantees a payment upon death, and the price of the policy depends on how much money you want your beneficiary to receive. Policies can be purchased for $10,000 or millions of dollars. You can name anyone as your beneficiary or even have multiple beneficiaries. A beneficiary can be a person, persons, or an organization, such as a university, church, or any other charitable organization. The two most common reasons people buy life insurance is to leave money to cover debts they want paid, such as the mortgage on a house or money to educate children or grandchildren, or to leave an estate for their loved ones. Some companies provide life insurance as part of their employment contract.

Question 13

Phil has a life insurance policy that provides a death benefit based on his age, health, and life expectancy. His policy is the simplest form of insurance and is called ________ life insurance.
A) term
B) mortality
C) whole
D) permanent
E) variable

Accepted Answer

Based on this scenario, Phil has a term life insurance policy. This policy provides a death benefit based on his age, health, and life expectancy.

Question 14

A whole life insurance policy is
A) a policy that covers you for your entire life.
B) a policy that covers all your insurance needs, including automobile, home, and life.
C) a policy that costs less than a term life policy.
D) a term life policy with a savings account.
E) a policy that makes you wait until you die to get financial rewards for your loved ones.

Accepted Answer

An insurance policy that combines a term life policy and a savings account is called a whole life policy. This type of policy costs more than term life because the extra amount paid is invested by the insurance company and provides a guaranteed cash value to the policyholder. With this type of policy, you do not have to wait until you die to get some financial rewards.

Question 15

Clayton buys an insurance policy that invests his set savings amount into financial assets without guaranteeing the return. Thus, Clayton has the opportunity to get a better return than the guaranteed rate. Which type of insurance policy does this scenario best describe?
A) investors life insurance
B) fixed-rate life insurance
C) term life insurance
D) whole life insurance
E) variable life insurance

Accepted Answer

In this scenario, Clayton has purchased a variable life insurance policy. Insurance companies have created this type of policies that invest the savings amount into financial assets without guaranteeing the return. Thus, the policyholder does not get a guaranteed rate of return but has the opportunity to get a better return than the guaranteed rate.

Question 16

An annuity is
A) always an annual payment.
B) a guaranteed equal payment for a given number of periods.
C) always a monthly payment.
D) a payment that does not have to be equally spaced.
E) a payment that can be made anytime after you receive the bill.

Accepted Answer

An annuity is a guaranteed equal payment for a given number of periods. The word annuity might make you think it has to be an annual payment, but general interpretation is that the payments must be equally spaced, so monthly, quarterly, or annual payments all qualify as annuities.

Question 17

All of these scenarios are examples of annuities EXCEPT
A) Chris only has to pay credit card bills when he buys items with his card.
B) Mallory pays $500 in rent every month.
C) Steve pays monthly installments of $50 per month for the holiday presents he bought on layaway.
D) Crystal pays a heating and air conditioning specialist $150 twice per year to prepare her temperature control system prior to Summer and Winter.
E) Kate pays $1,500 per month for her mortgage.

Accepted Answer

Mallory, Steve, Crystal, and Kate are all paying annuities, or guaranteed equal payments for a given number of periods. Monthly, quarterly, and annual payments all qualify as annuities. For example, a monthly car payment, a monthly mortgage payment, and a semi-annual bond interest payment would be annuities.

Question 18

What is true regarding annuities?
A) They only benefit you if you live longer than expected.
B) They give you variable returns and a higher rate of return.
C) They are less risky than the stock and bond markets because they let you know what your monthly income will be.
D) They only benefit you if you don't retire.
E) They usually benefit the insurance company more than they benefit you.

Accepted Answer

Insurance companies offer people the ability to buy annuities, with the insurance company guaranteeing the payments for a specific period of years, most often the life of the annuitant (the person receiving the annuity). If you retire, you wouldn't want to take a risk in the stock and bond markets, and you would like to know what your monthly income would be. If you have a retirement account worth $1 million, and the life insurance company guarantees you a 5 percent return for life, you could receive an annual payment of $83,870. Given that financial returns are volatile from one year to the next, you have exchanged variable returns for stable returns and have probably taken a lower rate of return than you could have gotten by having an investment advisor managing your money.

Question 19

All of the following are types of property for which you can buy property casualty insurance EXCEPT
A) intangible possessions.
B) houses.
C) automobiles.
D) stamp collections.
E) physical possessions.

Accepted Answer

You can buy property casualty insurance for all types of property, including houses, automobiles, and physical possessions such as paintings, pianos, stamp collections, and jewelry, to name a few.

Question 20

What explains why property casualty insurance is sometimes called property and liability insurance?
A) because the policy takes away any responsibility the policyholder might have if his or her own property is damaged
B) because the policy protects the policyholder if someone else damages his or her property
C) because the policy covers the policyholder's liabilities and assets
D) because the policy protects the policyholder from faulty products
E) because the policy includes coverage for damage to other people or property

Accepted Answer

Property casualty insurance is sometimes called property and liability insurance because the policy includes coverage for any liability the policyholder might suffer because of damage to other people or property. The insurance protects you up to a loss limit that you specify when you buy the insurance.

Quiz 20: Appendix C: Risk: The Basics of Risk Management

Risk is something we only face occasionally in our lives.

You can insure against the possibility of financial risk of loss by buying casualty insurance.

The law of large numbers postulates that as a sample size grows, the mean of the sample will get further away from the mean of the total population.

One of the most common types of insurance policies is disability insurance.

All of the following are examples of risks EXCEPT when

All of the following are considered to be uninsurable risks EXCEPT

Molly invests in stocks and bonds, which have the possibility of a gain or a loss. What can be used to cover her possible losses from fluctuating prices?

Taking more risk means potential for

Allister's Auto Insurance Company adjusts its rates on automobile insurance annually. The price of the company's policies reflects all of the following EXCEPT the

Why do insurance companies like to insure many people?

Which statement is true regarding the reserves kept by insurance companies?

All of the following are true regarding life insurance policies EXCEPT

Phil has a life insurance policy that provides a death benefit based on his age, health, and life expectancy. His policy is the simplest form of insurance and is called ________ life insurance.

A whole life insurance policy is

Clayton buys an insurance policy that invests his set savings amount into financial assets without guaranteeing the return. Thus, Clayton has the opportunity to get a better return than the guaranteed rate. Which type of insurance policy does this scenario best describe?

An annuity is

All of these scenarios are examples of annuities EXCEPT

What is true regarding annuities?

All of the following are types of property for which you can buy property casualty insurance EXCEPT

What explains why property casualty insurance is sometimes called property and liability insurance?