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.

1.I am insurance that provides for living and illnesses generally associated with nearing end-of-life, which frequently have my policyholders being in assisted living or a nursing home. Who am I?  

a.term life insurance

b.long-term care insurance

c.Medicare

d.managed care health plan

e.whole life insurance

Answer 1

Part 1.

Disproportionate amount of policies in higher risk category is a problem adverse selection. This originates from the difference in level of information between the seller and buyer. In insurance, this is caused by more buyers of the policy belonging to high risk category, enrolled by the insurance company unknowingly. Hence the answer is option c.

Part 2.

The type of insurance described is 'Long term care insurance'. This insurance is meant for persons who are unable to perform a few of the basic needs. Such deficiencies generally appear towards old age. The answer is option b.

Other plans given have specific features other than those mentioned.