Question

Insurance companies in general must guard against having a disproportionate number of bad risks as policyholders.  For their own profitability, they need to see the total payouts for a year as a fairly small percentage of the total premiums. This fundamental problem for insurance companies is known as

	a.	inflation risk.
	b.	co-insurance.
	c.	adverse selection.
	d.	deductible risk.
	e.	rate of return risk.

As a deterrent to keep individuals from excessively submitting claims to the insurance policy and for policyholders to follow responsible behavior, particular in the case of auto insurance, insurance companies commonly use

	a.	100% coverage.
	b.	inflation protection.
	c.	risk-based premiums.
	d.	no-fault insurance.
	e.	changing phone numbers

The annual performance of an individual or market basket of stocks in percentage terms is measured by the

	a.	interest rate.
	b.	rate of return.
	c.	dividend payment.
	d.	stock price.
	e.	capital gain.

Answer 1

Answer:- Option (c):- adverse selection

Explanation:- Disproportionate amount of policies in higher risk category is a problem of adverse selection. The given fundamental problem for insurance companies is adverse selection.

Answer:- Option (a):- 100% coverage

Explanation:- As a deterrent to keep individuals from excessively submitting claims to the insurance policy, insurance companies commonly use 100% coverage.

Answer:- Option (b):- rate of return

Explanation:- The annual performance of an individual or market basket of stocks in percentage terms is measured by the rate of return.