Deck 17: Insurance Companies and Pension Funds

Question 1

Pure risk and objective risk are both assumed by life insurance companies.

Answer 1

True

Question 2

Life insurance companies provide protection against death.

Answer 2

False

Question 3

Coinsurance and deductibles are a form of loss-sharing designed to limit objective risk.

Answer 3

True

Question 4

Term life policies provide maximum life insurance dollar protection for consumers for a given amount of premium.

Question 5

An annuity provides both insurance against premature death and savings features.

Question 6

Objective risk is the deviation of actual losses from expected losses.

Question 7

Cash‐flow underwriting means writing insurance at a discounted price in order to get
the premium dollars to invest at high interest rates.

Question 8

High premiums and tight underwriting standards are called a soft insurance market.

Question 9

Property/liability insurance companies pay little federal income tax, thus explaining their large portfolio of state and municipal, tax-exempt securities.

Question 10

Life insurance and pension reserves are liquid asset balances held by life insurance companies to pay losses and pension benefits.

Question 11

The liability of Lloyds of London members on assumed risks are unlimited.

Question 12

The sale of term life insurance has traditionally been the largest component of life insurance policies.

Question 13

Social Security is a fully funded pension program.

Question 14

Universal life became popular in the inflationary, high interest periods of the 1980s because interest rates on universal life policies vary with market rates.

Question 15

Though stock companies dominated the number of life insurance companies, mutuals are dominant in terms of assets and insurance in force.

Question 16

Life insurance companies are the oldest financial intermediary in the United States.

Question 17

Social Security relies on current payroll tax receipts to pay current beneficiaries.

Question 18

Health insurance includes protection against the risk of large, unexpected medical expenses and/or the loss of income from illness or disability.

Question 19

Speculative risk is not generally insurable.

Question 20

The assets of life insurance companies need not be as liquid as those of casualty/property insurance companies because life companies have greater certainty of claims.

Question 21

All insurers must deal with the problem of adverse selection but certain types of insurance such as flood insurance have greater adverse selection problems.

Question 22

Liability risk is much easier to gauge than property risk.

Question 23

"Fully contributory plans" are funded with employee contributions only.

Question 24

The process of deciding whether to accept a risk is termed the underwriting decision.

Question 25

The law of large numbers as applied to insurance is an application of the diversification principle.

Question 26

Municipal bonds are a logical investment for "qualified" pension plans.

Question 27

If you are terminated before you are fully vested in an employer-sponsored plan, you may not get to keep previous contributions to your pension made by your employer.

Question 28

Since insurance pricing is an application of the theorem of large number, the risk to be insured must be homogeneous, similar, and occurring by chance.

Question 29

A societal benefit of insurance companies is the transference of risk from insureds to professional insurance companies.

Question 30

Pure risk is a risk that results in either a loss or no loss, but does not result in a gain.

Question 31

The primary motivation for demutualization of insurance companies has to been to reduce their regulatory burden.

Question 32

Insurance is mostly regulated by state rather than federal law.

Question 33

"Superannuation" refers to living long enough to use up all your retirement funds.

Question 34

Policy reserves are the major asset of the typical life insurance companies.

Question 35

Social Security benefits stress individual equity rather than social adequacy.

Question 36

Level premium whole life insurance builds a cash value for the policy holder because the insured overpays for the insurance coverage received.

Question 37

Discuss how contractual financial institutions such as insurers and pension funds contribute to society.

Question 38

Many insurance companies use standard policy forms developed by the Insurance Services Office (ISO).

Question 39

Over the long term Social Security could be as much as $10 trillion underfunded.

Question 40

USAA is an example of an interinsurance association.

Question 41

Why does the government need to provide assistance with certain types of insurance such as flood insurance?

Question 42

How does the Affordable Care and Patient Protection Act worsen the adverse selection problem and the moral hazard problem in health insurance?

Question 43

Describe the basics of whole life, variable, universal life and term life policies. What are the advantages and disadvantages of policies with cash values and those without?

Question 44

Why should you be wary of counting on Social Security to fund your retirement?Is Social Security a good deal for the typical middle or upper income taxpayer?

Question 45

Describe how the combined ratio on a P&C insurance line is calculated. At what point does the combined ratio indicate that underwriting was profitable? If the line was profitable, how can the insurance firm still make money on the line now and in the future?

Question 46

What is a "Lloyd's association"?

Question 47

Why do property/casualty insurance companies place a large percentage of their investments in bonds? Why they also need to maintain large surpluses in certain years?