CPCU 500 | Practice Questions & Verified Answers
Risk uncertainty of outcomes
The insurance industry is evolving as a result of two key, the growing demand for risk management consulting
overarching factors that are influencing virtually every
aspect of the insurance value chain: new technology that's helping organizations predict and prevent losses
Examples of Technology Used to Predict and Prevent Telematics- has greatly influenced vehicle and driver safety
Losses
Wearables
IoT Sensors
Smartphones
Cloud Storage
Predictive Models
Artificial Intelligence
Law of Large Numbers A mathematical principle stating that as the number of similar but independent
exposure units increases, the relative accuracy of predictions about future
outcomes (losses) also increases.
Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to
drive it to special events at schools around the country where it will serve as a
mobile billboard to promote his product. Oscar is surprised to learn that insurers are
reluctant to insure his vehicle because it fails to meet one of the ideal characteristics
of an insurable risk. Which characteristic is Oscar's vehicle least likely to meet?
Smart Product An innovative item that uses sensors; wireless sensor networks; and data collection,
transmission, and analysis to further enable the item to be faster, more useful, or
otherwise improved.
Sensor A device that detects and measures stimuli in its environment.
Wireless sensor network (WSN) A wireless network consisting of individual sensors placed at various locations to
exchange data.
Big data Sets of data that are too large to be gathered and analyzed by traditional methods.
Internet of Things (IoT) A network of objects that transmit data to computers.
Predictive analytics Statistical and analytical techniques used to develop models that predict future
events or behaviors.
Data science An interdisciplinary field involving the design and use of techniques to process very
large amounts of data from a variety of sources and to provide knowledge based on
the data.
Grade A+ | Updated
, CPCU 500 | Practice Questions & Verified Answers
These decisions can have far-reaching effects across the Determining the appropriate coverage limits for an individual policy
insurance value chain:
Choosing whether to have a prospective customer elaborate on information
provided in an insurance application
Deciding what data to include in a predictive model and where it should come from
Determining whether a claim shows signs of fraud and should be reported to the
special investigation unit (SIU)
Deciding the best way to respond empathetically to a customer's claim
Determining how to describe your ideal job candidate for an open position to a
recruiter or hiring manager
What's the difference between occurrence and claims- Under an occurrence policy, coverage is triggered for losses that happen within the
made coverage policy period, even if the policy has expired. Under a claims-made policy, coverage
is triggered for claims that occur after the policy's coverage began (the retroactive
date) and are reported within the policy's reporting period.
social inflation The increasing of insurance losses caused by higher jury awards, increase in liberal
treatment of claims by workers compensation boards, legislated rises in
compensation benefit levels (in some cases retroactively), and new concepts of tort
and negligence, among others.
These are some of the most common risk classifications Pure and speculative risk
Subjective and objective risk
Diversifiable and nondiversifiable risk
Quadrants of risk (hazard, operational, financial, and strategic)
Several factors can affect speculative risk Price risk—Uncertainty about cash flows resulting from possible changes in the cost
of raw materials and other inputs (such as lumber, gas, or electricity), as well as
cost-related changes in the market for completed products and other outputs.
EXAMPLE- Four Grains Cereal Company signed a contract to deliver 250,000
boxes of cereal to a national supermarket chain at a specified price per box of
cereal six months from today. Between now and when the grain to make the cereal
is purchased, the cost of the grain may increase. If the cost of this important
ingredient increases, the profitability of the transaction will be altered. This financial
risk that Four Grains faces is
Input Price- Uncertainty of the price of the resources used to produce an
organization's product
Output Price- Uncertainty regarding the price an organization can charge for its
product
Credit risk- risk that customers or other creditors will fail to make promised
payments as they come due.—Although a credit risk is particularly significant for
banks and other financial institutions, it can also be relevant to any organization
with accounts receivable.
Subjective and objective risks can differ in other ways as Familiarity and control
well:
Consequences over likelihood
Risk awareness
Grade A+ | Updated
, CPCU 500 | Practice Questions & Verified Answers
Quadrants of Risk Hazard risks—These arise from property, liability, or personnel loss exposures and
are generally the subject of insurance.
Operational risks—These fall outside the hazard risk category and arise from
people or a failure in processes, systems, or controls, including those involving
information technology.
EXAMPLE- Jean is the Risk Manager for a Fortune 1000 company. Her CFO has
tasked her to analyze vulnerabilities in the firm's supply chain. The adequacy of
suppliers to meet an organization's needs would be an example of which one of the
following types of risk?
Financial risks—These risks arise from market forces on financial assets or
liabilities and include market risk, credit risk, liquidity risk, and price risk. EXAMPLE-
An organization practicing holistic risk management would assess the cost of raw
materials and foreign exchange risk
Strategic risks—These arise from trends in the economy and society, including
changes in the economic, political, and competitive environments, as well as from
demographic shifts. EXAMPLE- A new computer chip that could position a company
for explosive growth is an example of
EXAMPLE- Hardware Store has been able to control its prices and inventory since it
has no competitors. A new highway currently being constructed is going to allow
increased competition for Hardware Store. According to the quadrants of risk, this
risk of increased competition falls into the category of
the four quadrants of risk focus on the source of risk and who has traditionally
managed it
Which one of the following best describes the categories of risk included in the
enterprise risk management model?
Hazard, Operational, Financial, Strategic
Pure risk A chance of loss or no loss, but no chance of gain.
Speculative risk A chance of loss, no loss, or gain.
Credit risk The risk that customers or other creditors will fail to make promised payments as
they come due.
One financial risk for an insurer is that the insured will not pay all of the premiums
when the premiums are due
Subjective risk The perceived amount of risk based on an individual's or organization's opinion.
Subjective risk can exist even where objective risk does not
EXAMPLE- Billy owns a beach front cottage which has become his primary
residence. Billy's primary concern is that his home will be hit by a hurricane and
badly damaged or even destroyed. For Billy, this hurricane risk is a subjective risk
Objective risk The measurable variation in uncertain outcomes based on facts and data.
Diversifiable risk A risk that affects only some individuals, businesses, or small groups.
Systemic risk The potential for a major disruption in the function of an entire market or financial
system.
Grade A+ | Updated
Risk uncertainty of outcomes
The insurance industry is evolving as a result of two key, the growing demand for risk management consulting
overarching factors that are influencing virtually every
aspect of the insurance value chain: new technology that's helping organizations predict and prevent losses
Examples of Technology Used to Predict and Prevent Telematics- has greatly influenced vehicle and driver safety
Losses
Wearables
IoT Sensors
Smartphones
Cloud Storage
Predictive Models
Artificial Intelligence
Law of Large Numbers A mathematical principle stating that as the number of similar but independent
exposure units increases, the relative accuracy of predictions about future
outcomes (losses) also increases.
Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to
drive it to special events at schools around the country where it will serve as a
mobile billboard to promote his product. Oscar is surprised to learn that insurers are
reluctant to insure his vehicle because it fails to meet one of the ideal characteristics
of an insurable risk. Which characteristic is Oscar's vehicle least likely to meet?
Smart Product An innovative item that uses sensors; wireless sensor networks; and data collection,
transmission, and analysis to further enable the item to be faster, more useful, or
otherwise improved.
Sensor A device that detects and measures stimuli in its environment.
Wireless sensor network (WSN) A wireless network consisting of individual sensors placed at various locations to
exchange data.
Big data Sets of data that are too large to be gathered and analyzed by traditional methods.
Internet of Things (IoT) A network of objects that transmit data to computers.
Predictive analytics Statistical and analytical techniques used to develop models that predict future
events or behaviors.
Data science An interdisciplinary field involving the design and use of techniques to process very
large amounts of data from a variety of sources and to provide knowledge based on
the data.
Grade A+ | Updated
, CPCU 500 | Practice Questions & Verified Answers
These decisions can have far-reaching effects across the Determining the appropriate coverage limits for an individual policy
insurance value chain:
Choosing whether to have a prospective customer elaborate on information
provided in an insurance application
Deciding what data to include in a predictive model and where it should come from
Determining whether a claim shows signs of fraud and should be reported to the
special investigation unit (SIU)
Deciding the best way to respond empathetically to a customer's claim
Determining how to describe your ideal job candidate for an open position to a
recruiter or hiring manager
What's the difference between occurrence and claims- Under an occurrence policy, coverage is triggered for losses that happen within the
made coverage policy period, even if the policy has expired. Under a claims-made policy, coverage
is triggered for claims that occur after the policy's coverage began (the retroactive
date) and are reported within the policy's reporting period.
social inflation The increasing of insurance losses caused by higher jury awards, increase in liberal
treatment of claims by workers compensation boards, legislated rises in
compensation benefit levels (in some cases retroactively), and new concepts of tort
and negligence, among others.
These are some of the most common risk classifications Pure and speculative risk
Subjective and objective risk
Diversifiable and nondiversifiable risk
Quadrants of risk (hazard, operational, financial, and strategic)
Several factors can affect speculative risk Price risk—Uncertainty about cash flows resulting from possible changes in the cost
of raw materials and other inputs (such as lumber, gas, or electricity), as well as
cost-related changes in the market for completed products and other outputs.
EXAMPLE- Four Grains Cereal Company signed a contract to deliver 250,000
boxes of cereal to a national supermarket chain at a specified price per box of
cereal six months from today. Between now and when the grain to make the cereal
is purchased, the cost of the grain may increase. If the cost of this important
ingredient increases, the profitability of the transaction will be altered. This financial
risk that Four Grains faces is
Input Price- Uncertainty of the price of the resources used to produce an
organization's product
Output Price- Uncertainty regarding the price an organization can charge for its
product
Credit risk- risk that customers or other creditors will fail to make promised
payments as they come due.—Although a credit risk is particularly significant for
banks and other financial institutions, it can also be relevant to any organization
with accounts receivable.
Subjective and objective risks can differ in other ways as Familiarity and control
well:
Consequences over likelihood
Risk awareness
Grade A+ | Updated
, CPCU 500 | Practice Questions & Verified Answers
Quadrants of Risk Hazard risks—These arise from property, liability, or personnel loss exposures and
are generally the subject of insurance.
Operational risks—These fall outside the hazard risk category and arise from
people or a failure in processes, systems, or controls, including those involving
information technology.
EXAMPLE- Jean is the Risk Manager for a Fortune 1000 company. Her CFO has
tasked her to analyze vulnerabilities in the firm's supply chain. The adequacy of
suppliers to meet an organization's needs would be an example of which one of the
following types of risk?
Financial risks—These risks arise from market forces on financial assets or
liabilities and include market risk, credit risk, liquidity risk, and price risk. EXAMPLE-
An organization practicing holistic risk management would assess the cost of raw
materials and foreign exchange risk
Strategic risks—These arise from trends in the economy and society, including
changes in the economic, political, and competitive environments, as well as from
demographic shifts. EXAMPLE- A new computer chip that could position a company
for explosive growth is an example of
EXAMPLE- Hardware Store has been able to control its prices and inventory since it
has no competitors. A new highway currently being constructed is going to allow
increased competition for Hardware Store. According to the quadrants of risk, this
risk of increased competition falls into the category of
the four quadrants of risk focus on the source of risk and who has traditionally
managed it
Which one of the following best describes the categories of risk included in the
enterprise risk management model?
Hazard, Operational, Financial, Strategic
Pure risk A chance of loss or no loss, but no chance of gain.
Speculative risk A chance of loss, no loss, or gain.
Credit risk The risk that customers or other creditors will fail to make promised payments as
they come due.
One financial risk for an insurer is that the insured will not pay all of the premiums
when the premiums are due
Subjective risk The perceived amount of risk based on an individual's or organization's opinion.
Subjective risk can exist even where objective risk does not
EXAMPLE- Billy owns a beach front cottage which has become his primary
residence. Billy's primary concern is that his home will be hit by a hurricane and
badly damaged or even destroyed. For Billy, this hurricane risk is a subjective risk
Objective risk The measurable variation in uncertain outcomes based on facts and data.
Diversifiable risk A risk that affects only some individuals, businesses, or small groups.
Systemic risk The potential for a major disruption in the function of an entire market or financial
system.
Grade A+ | Updated
