AFC Risk Management and Insurance 5 — Questions and Answers
Question 1: Which of the following best describes the concept of 'adverse selection' in insurance markets?
- Insurers pricing policies too high for low-risk customers
- High-risk individuals are more likely to seek insurance than low-risk individuals (Correct answer)
- Insurers denying claims to maximize profits
- Policyholders reducing risky behavior after obtaining coverage
Correct answer: High-risk individuals are more likely to seek insurance than low-risk individuals
Adverse selection occurs when people with higher-than-average risk are disproportionately drawn to purchase insurance, potentially destabilizing the risk pool.
Question 2: A client wants long-term care insurance. Which benefit trigger is most commonly used by policies to determine when benefits begin?
- Inability to perform 2 of 6 Activities of Daily Living (ADLs) (Correct answer)
- A physician's recommendation alone
- Hospitalization for more than 3 consecutive days
- Inability to perform all 6 ADLs
Correct answer: Inability to perform 2 of 6 Activities of Daily Living (ADLs)
Most LTC policies begin paying benefits when the insured cannot perform at least 2 of 6 ADLs (bathing, dressing, eating, toileting, transferring, continence) or has cognitive impairment.
Question 3: What is 'moral hazard' in the context of insurance?
- The tendency for insured individuals to take on more risk because losses are covered (Correct answer)
- The insurer's risk of insuring immoral behavior
- Fraudulent misrepresentation on an insurance application
- The risk that an agent will recommend unsuitable coverage
Correct answer: The tendency for insured individuals to take on more risk because losses are covered
Moral hazard describes the behavioral change where insured individuals may take greater risks or be less careful because they know financial losses are covered by insurance.
Question 4: Under the ACA, health plans must cover preventive services without cost-sharing if they receive an 'A' or 'B' rating from which body?
- Centers for Medicare & Medicaid Services (CMS)
- U.S. Preventive Services Task Force (USPSTF) (Correct answer)
- American Medical Association (AMA)
- National Institutes of Health (NIH)
Correct answer: U.S. Preventive Services Task Force (USPSTF)
The ACA requires non-grandfathered plans to cover preventive services rated A or B by the USPSTF at no cost to the patient.
Question 5: A client purchased a $250,000 20-year term life policy 10 years ago. They now want permanent coverage. Which conversion option is most common in term policies?
- Convert to a whole life policy without new medical underwriting (Correct answer)
- Renew the term for another 20 years at the same premium
- Exchange the policy for an annuity of equal value
- Convert to a universal life policy only if in perfect health
Correct answer: Convert to a whole life policy without new medical underwriting
Most term policies include a conversion provision allowing the policyholder to convert to a permanent policy without proving insurability, regardless of current health status.
Question 6: Which factor does NOT directly affect a client's auto insurance premium under standard underwriting practices?
- Credit score (in states where permitted)
- Annual mileage driven
- Color of the vehicle (Correct answer)
- Garaging location (ZIP code)
Correct answer: Color of the vehicle
Vehicle color does not affect auto insurance premiums; insurers consider factors like driving record, credit score, vehicle make/model, mileage, and location.
Question 7: A client's life insurance policy has a 'waiver of premium' rider. What does this rider provide?
- The insurer waives all future premiums if the insured becomes totally disabled (Correct answer)
- The beneficiary receives a refund of premiums paid upon the insured's death
- The policyholder can skip one premium payment per year without lapsing
- The insurer waives the deductible on any associated health claims
Correct answer: The insurer waives all future premiums if the insured becomes totally disabled
A waiver of premium rider keeps a life insurance policy in force without premium payments if the insured becomes totally disabled, typically after a 6-month waiting period.
AFC Risk Management and Insurance 5
Which of the following best describes the concept of 'adverse selection' in insurance markets?