#1
What are residual markets in insurance?
Markets for high-risk individuals or properties that cannot obtain coverage in the standard insurance market
ExplanationResidual markets cater to high-risk entities unable to secure standard insurance.
#2
Which of the following is a characteristic of residual markets?
They are state-sponsored mechanisms
ExplanationResidual markets are supported by state-sponsored mechanisms.
#3
In which type of insurance market are residual markets most commonly found?
Property and casualty insurance
ExplanationResidual markets are most prevalent in property and casualty insurance.
#4
What role do insurance agents play in residual markets?
They facilitate the placement of high-risk policies in residual markets
ExplanationInsurance agents assist in placing high-risk policies within residual markets.
#5
Which of the following statements about residual markets is true?
They are often funded by taxes or assessments
ExplanationResidual markets are commonly financed through taxes or assessments.
#6
What is the primary reason behind the existence of residual markets?
To address market failures and ensure availability of coverage for high-risk individuals or properties
ExplanationResidual markets exist to rectify market failures and provide coverage for high-risk entities.
#7
What is the role of residual market entities?
To act as insurers of last resort
ExplanationResidual market entities function as insurers of last resort.
#8
Which of the following factors can contribute to the existence of residual markets?
Inadequate regulation of insurance markets
ExplanationResidual markets can arise due to inadequate insurance market regulation.
#9
What is adverse selection in the context of residual markets?
The tendency for high-risk individuals to seek coverage more than low-risk individuals
ExplanationAdverse selection refers to high-risk individuals seeking coverage disproportionately.
#10
Which of the following is NOT a strategy used to manage residual market risk?
Exclusion of high-risk individuals
ExplanationExclusion of high-risk individuals is not a strategy for managing residual market risk.
#11
What distinguishes residual markets from the standard insurance market?
Residual markets are state-sponsored mechanisms for high-risk individuals or properties
ExplanationResidual markets are state-sponsored mechanisms tailored for high-risk entities.
#12
Which of the following is an example of a residual market entity?
State insurance pool
ExplanationState insurance pools are examples of residual market entities.
#13
How do insurance regulators typically manage residual markets?
By establishing state-sponsored insurance pools or associations
ExplanationInsurance regulators manage residual markets by setting up state-sponsored pools or associations.
#14
What role does reinsurance play in residual markets?
To spread the risk of high-risk policies among multiple insurers
ExplanationReinsurance disperses risk from high-risk policies among various insurers.
#15
Which of the following is a potential consequence of a poorly managed residual market?
Market instability and adverse economic impacts
ExplanationPoor management of residual markets can lead to market instability and adverse economic effects.
#16
What is the purpose of risk-based pricing in residual markets?
To charge premiums based on the perceived risk of the insured
ExplanationRisk-based pricing in residual markets aligns premiums with perceived risk.
#17
How do residual markets contribute to financial stability?
By spreading risk across a broader pool of policyholders
ExplanationResidual markets enhance financial stability by distributing risk among more policyholders.
#18
What is one way to reduce the reliance on residual markets?
By improving risk management and loss prevention
ExplanationReducing reliance on residual markets can be achieved through enhanced risk management.