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									Topic 27: Insurance Companies and Pension Funds
1. Major parts of the current health insurance system in the United States most
   closely parallel: (a) a compulsory national savings plan. (b) a benefit tax to pay
   for national defense. (c) an automobile insurance policy that covers such standard
   maintenance as lube, oil and filter changes. (d) Social Security taxes and benefits.
   (e) mergers and acquisitions during the “Age of the Robber Barons.”
2. The insurance provided to many U.S. citizens for prescriptions that costs
   taxpayers billions every year is known as: (a) Blue-Cross Blue-Shield. (b)
   Medicare and Medicaid. (c) the Federal Medical Insurance Administration. (d)
   Social Security.

3. The primary benefit of including a deductible in an insurance company is that: (a)
   it helps combat moral hazard. (b) it insures clients only against specifically stated
   perils. (c) it defers some of the costs onto stockholders. (d) deductibles are not
   taxed income. (e) plans with deductibles are more attractive to potential clients.

4. Those who review and approve policies written by insurance agents are called: (a)
   closers. (b) underwriters. (c) screeners. (d) brokers. (e) risk managers.

5. By obtaining reinsurance, an insurance company shifts some of its risk to another
   firm in exchange for: (a) a corporate bond of equal present value. (b) a portion of
   the premium. (c) some of that company’s risk, which is a technique that facilitates
   diversification. (d) restrictive provisions. (e) common stock. (f) profit-sharing.

6. All of the following are fundamental principles of insurance except: (a) all losses
   must be quantifiable. (b) the probability of a loss occurring must be calculable. (c)
   there must be some relationship between the insured and the beneficiary. (d) the
   beneficiary is responsible for furnishing full and accurate information to the
   insurance company at the outset. (e) on average, the insured must not have an
   expectation of profit from coverage.

7. An insurance policy that tends to be most beneficial for people who live
   significantly longer than expected is a/an: (a) open-peril policy. (b) annuity. (c)
   certainty equivalent policy. (d) defined-contribution plan. (e) open-peril policy.

8. The Employee Retirement Income Security Act (ERISA) provided, among other
   things, that: (a) employees who switch jobs may transfer credits from their
   previous employer to their new one. (b) regulatory oversight of pension funds is
   the responsibility of the Department of Commerce. (c) pension plans must have
   maximum vesting requirements. (d) the government may issue individual
   retirement accounts (IRAs).

9. The practice of sharing losses between the insurance company and the
   policyholder is: (a) reinsurance. (b) screening. (c) coinsurance. (d) principal-agent
   sharing. (e) underwriting.
10. All of these methods are used to reduce the risk an insurance company bears
    except: (a) reinsurance. (b) underwriting. (c) requiring a deductible. (d)

11. A named-peril policy is another name for a/an: (a) open-peril policy. (b) casualty
    insurance policy. (c) defined-contribution policy. (d) defined-benefit plan. (e)
    private pension plan.

12. As a general rule, if a third party compensates an insured person for a loss, then:
    (a) the insurance policy becomes null and void. (b) the insurance company is still
    obligated to compensate for the full value of the loss. (c) the third party takes
    legal responsibility for the entire loss. (d) the insurance policy is said to be
    underfunded. (e) the insurance company’s obligation is diminished by the amount
    of compensation.

13. In the long run, adoption of the proposal to at least partially privatize Social
    Security is least likely to: (a) increase the level of national debt. (b) boost the
    income shares of people at the top of the pyramid, while reducing the shares of
    low- income people. (c) significantly increase post-retirement real incomes for
    most senior citizens. (d) raise interest rates paid very short-term U.S. Treasury
    bonds and other federal debt. (e) intensify moral hazard problems because if
    prospective retirees are confident that a senior citizen voting bloc will bail out
    people whose investments fail, they are likely to engage in excessively risky
    investment strategies. (f) the size of a federal bureaucracy because some agency
    will screen investments to identify those suitable for potential retirees. (g)
    increase the level of the stock market and drive down the rate of return for
    financial investors. (h) boost the relative incomes of mutual firm managers and
    stock brokerage firms.
14. The least likely of the following possible consequences of privatization of the
    Social Security system would be an increase in the: (a) average rate of return
    realized by investors in “blue chip” common stocks. (b) overall riskiness of
    people’s pension portfolios. (c) interest rate paid on U.S. Treasury bonds. (d)
    average rates of return on savings realized by economics majors who have
    graduated from college. (e) inequality of the distribution of income and wealth in
    the United States.
15. The employee of an insurance company who uses historical data in an attempt to
    predict the probabilities of events is an: (a) actuary. (b) underwriter. (c) agent. (d)
    claims representative. (e) adjuster.
16. The difference between a whole life insurance policy and a term life policy is: (a)
    a term life policy acquires a cash value. (b) a whole life policy can be converted
    to a term life policy, but a term life policy cannot be converted to a whole life
    policy. (c) a term life policy can be converted to a whole life policy, but a whole
    life policy cannot be converted to a term life policy. (d) the implicit interest rate
    for a whole life policy tends to be high. (e) a whole life policy accumulates cash
    value, but a term life policy does not.
17. Risk aversion is most clearly manifested when people invest financially in: (a) US
    government bonds. (b) whole- life or universal life insurance policies. (c) the state
    lottery. (d) indexed mutual funds. (e) municipal bonds.

18. A typical insurance agent is likely to be happiest when an individual client buys a
    competitively-priced $250,000: (a) health insurance policy. (b) whole life policy.
    (c) auto collision and liability insurance policy to cover possible accidents while
    driving his gold-plated Hummer. (d) term life insurance policy.
19. Policies intended to reduce moral hazard for insurance companies do not include:
    (a) offering insurance to groups. (b) deductibles. (c) restrictive provisions. (d)
    coinsurance. (e) limiting the amount of insurance coverage.

20. NOT among reasons why most life insurance is purchased through employer or
    other group plans is: (a) the relative ease of the process. (b) decreased cost,
    because of economies of scale in marketing for insurance companies. (c) the
    relative scarcity of independent insurance agents. (d) screening by trusted
    committees (of, e.g., employees), thereby reducing the research costs for the
    individual buyer.
21. The reason most large organizations offer group life and health insurance to
    employees and their families and that few such employees instead buy similar
    insurance privately and personally is that: (a) premiums on group insurance plans
    are tax deductible. (b) insurance companies charge lower premiums for group
    policies because economies of scale reduce their transaction costs in marketing. (c)
    firms offering group programs are subsidized by the selected insurers. (d) most
    major insurers strongly prefer not to deal with people who do not work for large
22. Insurance companies reduce moral hazard by their policyholders by: (a) having “co-
    pays” and deductibles. (b) rejecting clients who are not creditworthy. (c) making
    clients take a polygraph (d) charging high premiums. (e) not covering diseases their
    policyholders had before becoming policyholders.
23. Of the following financial intermediaries, the least liquid asset portfolios tend to be
    those held by: (a) property and casualty insurance companies. (b) commercial
    banks. (c) investment bankers. (d) life insurance companies. (e) money market
    mutual funds.
24. Detailed historical data are used to create estimates of the probabilities of events
    for insurance companies by: (a) actuaries. (b) underwriters. (c) agents. (d) claims
    representatives. (e) adjusters.
25. After adjusting for marketing and administrative costs and then an allowance for
    normal expected returns on their investments, insurance companies tend to set
    their premiums so that the probability of an event occurring multiplied by the
    expected pay-out roughly equals the premium charged because: (a) federal
    regulations require actuarial bases for insurance policies. (b) state regulators limit
    insurance company profits to normal rates of return. (c) the insurance industry is
    extremely competitive. (d) most insurance companies are organized as mutual
    funds owned by the insured individuals.
26. The process by which one insurance company allocates a portion of risk to
    another insurer by paying a portion of the premium is known as: (a) hedging
    insurance. (b) reinsurance. (c) option insurance. (d) coinsurance. (e) distributed
27. A deductible is: (a) used by the insurance companies for the sole purpose of
    making the insured pay at least something for their medical care. (b) one way
    insurance companies combat moral hazard. (c) charged because it is the only way
    insurance companies can make a profit. (d) always given directly to the doctor
    and his staff for transactions costs.

28. Old Mac Donald’s wife just went and bought the farm but three years earlier the
    couple had dumped her _______________ insurance to use the cash value to buy
    stock while good times were rolling. However, their broker neglected to tell them
    to ______________ so Mac Donald is left with nothing following the tech market
    crash. (a) term life; hedge (b) universal life; pay taxes (c) named peril; hedge (d)
    universal life; diversify

29. To determine specific premiums for specific policies, insurance company
    actuaries rely primarily on estimates of what can be characterized as: (a) fuzzy
    risk. (b) precise probabilities. (c) Knightian uncertainty. (d) precise uncertainty.
    (e) Knightian risk.

30. Compared to the premium an insurance company charges, the actuarial
    probability of an event occurring multiplied by the expected payoff is: (a) equal to
    the premium. (b) less than the premium. (c) greater than the premium. (d)
    unrelated to the premium.

31. The law of large numbers says that when many people are insured, the probability
    distribution of the pay-outs will ultimately facilitate accurate predictions by taking
    the form of a: (a) normal distribution [a standard bell curve]. (b) stable standard
    deviation. (c) Poisson function. (d) student- T- distribution. (e) uniform
32. Whole-life and universal- life policies are really combinations of: (a) casualty
    insurance and term life insurance. (b) “long-term” term insurance policies and low-
    interest rate saving plans. (c) disability insurance and life insurance. (d)
    comprehensive liability insurance and casualty insurance.
33. The types of life insurance policies that tend to have the lowest cost per dollar of
    coverage are: (a) whole life policies. (b) universal life policies. (c) term life policies
    sold to employees or members of organizations that offer group insurance. (d) the
    policies that yield the highest cash-surrender value at maturity. (e) term policies
    sold to you by your best friend.

34. The proceeds from insurance policies are tax- free, which provides incentives for
    firms to: (a) provide health insurance for executives, but not employees. (b)
    self- insure because premium surcharges compensate for the moral hazards to
    firms. (c) buy life insurance on employees if premiums are tax-deductible as
    business expenses. (d) pool their assets to take advantage of lower premiums for
    group rates as the group gets larger. (e) protect this unreliable revenue source by
    adopting stringent occupational safety and health standards.

Pension Funds
35. The dominant predictable economic problem posed by the expected wave of
    retirements by baby-boomers is that: (a) Social Security assets are projected to
    decrease below its income by 2034. (b) the government will be unable to generate
    funds to pay for Social Security. (c) the ratio of population to labor force is
    projected to increase dramatically as baby boomers start to retire. (d) the surplus
    funds in Social Security from past years have evaporated. (e) Social Security
    assets generate very low rates of return.

36. The investment decisions of pension fund administrators would be least
    comprehensible and most clearly inconsistent with the objectives of those whose
    funds they manage if they invested heavily in: (a) investment grade tax free
    municipal bonds. (b) a highly diversified portfolio of junk bonds. (c) blue chip
    corporate stocks. (d) U.S. Treasury bonds. (e) a seasoned issue of bonds being
    marketed by a reputable investment banker.

37. The difference between a private pension plan and a public pension plan is: (a) if
    an individual holds a private placement plan, they tend to be less riskier because
    they deal with fewer individuals. (b) a public pension plan is sponsored by a
    governmental authority or body. (c) a public pension plan tends to be invested in
    corporate bonds issued by the treasury and governmental securities. (d) a private
    pension plan includes social security regulated by the government.
38. Some recent proposals for privatization of Social Security would allow workers to
    personally manage parts of their “Social Security” savings. Advocates of these
    proposals assert that retirees would gain because of the higher average rates of
    return from private sector investments relative to the current Social Security
    fund’s portfolio of Treasury securities. NOT among the possible drawbacks of
    such a proposal is that such privatization would tend to: (a) increase the interest
    rate on national debt. (b) reduce the rate of return on non-Treasury financial assets
    in which private savers would be allowed to invest. (c) decrease the actual rate of
    saving in the United States relative to GDP. (d) increase the riskiness of the
    average retiree’s income.

39. Private pension plans: (a) were developed in the mid 1960s for individuals who
    would not be covered by Medicare. (b) are offered by the employer to only select
    employees who qualify. (c) have grown rapidly as people have become more
    concerned about the viability of Social Security and more sophisticated about
    preparing for retirement. (d) are pension plans available only to employees of the

40. Privatization of social security would be unlikely to increase the: (a) amounts of
    moral hazard people exhibit when considering how much to save for retirement.
    (b) ability of workers to control the structure of their savings portfolios. (c)
    relative wealth of smart and/or lucky financial investors. (d) levels of investment
    in Treasury securities and reduce aggregate default risk. (e) extent of inequality in
    the distribution of income and wealth in the United States.

41. The LEAST likely consequence of privatization of Social Security as proposed by
    President Bush would be: (a) relatively increased disparities in the distribution of
    after-tax income in the United States. (b) relative gains for astute and lucky investors
    who converted their Social Security accounts into private accounts. (c) reductions in
    the US Treasury’s interest costs of national debt. (d) some relatively small gains in
    the rate of capital accumulation and economic growth because families with higher
    incomes save relatively larger proportions of their incomes. (e) mora l hazard
    inducing excessively risky investments by individuals who reason that even if they
    lose because they convert their Social Security funds into government-approved
    private financial investments, political pressures will force the federal government to
    bail them out.

42. Pension plans are plagued by potential problems of asymmetric information,
    which led to the establishment of: (a) FDIC. (b) FED. (c) Underwriters
    Laboratories. (d) FHLBS. (e) ERISA. (f) Social Security Administration
43. Adverse selection in which biases in pension plans favoring only top managers of
    firms were frequently misrepresented persuaded the US Congress to establish the:
    (a) Federal Depository Insurance Corporation. (b) Social Security Administration.
    (c) Pension Insurance Administration. (d) Employee Retirement Income Security
    Administration (ERISA).
44. Administrators of pension plans know, in an actuarial sense, when payouts will
    occur, and how much payments are likely to be, so they invest in illiquid assets.
    Consequently, they often buy big blocks of new issues of: (a) municipal bonds.
    (b) US Treasury bills and bonds. (c) junk bonds. (d) revenue bonds and
    convertible bonds. (e) corporate stocks and corporate bonds.

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