Question

1. In terms of insurance, what is moral hazard and what do insurance companies do to try to offset it?​ 2. How did the drop in the birth rate cause problems for Social Security, and how would raising the benefits age help save the system? ​ 3. How did finance companies misrepresenting the risk of adjustable-rate mortgages and offering second mortgages for more than a home's value contribute to the financial crisis?​ 4. . What exactly is the role of the Federal Insurance Office (F.I.O.) how was this created?

Answer 1

1. Moral hazard occurs when insured behaves in such a way that costs to insurer increases.

Health insurer provider offset it by insituting a co-pay and deductibles with policy requiring insured to pay for part of the services they receive thereby reducing chances of high cost or false claims.

2. Low birth rate will result in low no. of workers to pay taxes that support social security program. Raising birth rate will result in large no. of workers to pay taxes helping social security.

3. Adjustable rate mortgage borrower benefit from lower monthly payment at the start. Once the interest rate start rising, monthly payment can increase dramatically. What was once an affordable (eay) payment becomes a serious burden with adjustable rate mortgage. The payment can get so high that you have to default on the debt. This is what resulted in crisis once rates started rising.

4. The role of FIO is to monitor all aspects of the insurance sector that includes identifying activities that could potentially contribute to a systemic -crisis, the extent to which under served communities have access to affordable insurance products, and the regulation of the insurance sector.