Lession #3 Quiz :Financial Markets (Financial Markets) answer 2025

Question 1

Which of these best describes risk pooling?

✅ If individual events are independent, risk can be decreased by averaging across all of the events
❌ If individual events are not independent, risk can be decreased by averaging across all of the events
❌ Sick people are more likely to sign up for health insurance, and healthy people will not purchase the policy because this will make the premium more expensive
❌ Insurance companies must avoid situations whereby customers are incentivized to intentionally cause an incident

Explanation:
Risk pooling works when individual risks are independent. By averaging many independent risks, overall uncertainty is reduced.

Question 2

Which of the following was NOT a factor which led to the proliferation of life insurance?

❌ Insurance salespeople
❌ Increased life expectancy
❌ Statistical data on life expectancy
✅ New sales pitches

Explanation:
Life insurance expanded due to better mortality statistics, longer life expectancy, and professional sales forces—not because of new sales pitches alone.

Question 3

What happens in the United States if your insurance company goes bankrupt?

❌ There is no protection from the government
✅ Consumers are insured from insurance company failure at the state level
❌ Insurance companies are partially owned by the government
❌ The federal government insures insurance companies like the FDIC

Explanation:
Insurance protection in the U.S. is handled by state-level guaranty associations, not the federal government.

Question 4

What problem does the US Affordable Care Act (“Obamacare”) attempt to address and how does it do so?

✅ It addresses selection bias by forcing everybody to buy health insurance or else face a tax penalty.
❌ It addresses moral hazard by allowing hospitals to refuse treatment
❌ It addresses moral hazard by forcing hospitals to provide emergency services
❌ It addresses selection bias by creating a fully publicly-funded system

Explanation:
The Affordable Care Act mainly targets adverse selection by encouraging broad participation through the individual mandate.

Question 5

One of the main reasons why many homeowners did not have flood insurance before Hurricane Katrina (2005) was:

✅ Homeowners thought that the likelihood of a flood was too low to justify buying insurance.
❌ Insurance premiums increased by 70%
❌ Homeowners were relying on the government
❌ Homeowners were unaware flood insurance existed

Explanation:
Many homeowners underestimated flood risk, leading them to opt out of flood insurance before Katrina.

🧾 Summary Table