CPCU 500
CPCU 500 - Foundations of Risk Management &
Insurance Questions And Answers
What are the two elements of risk? - CORRECT ANSWER ✔ - -Uncertainty of outcome - Time of the
outcome and type of outcome are uncertain
-Possibility of a negative outcome - at least 1 outcome is negative
What is the difference between probability and possibility? - CORRECT ANSWER ✔ - Possibility - an
outcome or event may or may not occur. It does not quantify the risk, only verifies the risk is there
Probability - the likelihood than an outcome will occur, quantifies the risk. It is measurable and has value
between zero and one
How does probability help an organizations risk management exposure? - CORRECT ANSWER ✔ - -by
understanding the probability of an exposure, an organization can focus its risk management efforts to
avoid it.
-helps organization decided what projects and activities to undertake
How does classifying a risk help an organizations risk management process? - CORRECT ANSWER ✔ - -
can help with assessing risk cause many risks in the same classification have similar attributes
-helps manage risks
-helps administrative function of RM by helping to ensure the risks in same class are less likely to be
overlooked
Compare pure risk with speculative risk, why is it important to distinguish between the 2 what making
risk management procedures - CORRECT ANSWER ✔ - pure risk - change of loss or no loss but no gain.
Speculative risk - involves a chance of gain. Type of SR includes: price risk and credit risk (financial
investments involve a distinct set of speculative risks). It’s important when making RM decisions cause
the 2 types must often be managed different. *most insurance policies are not designed to handle
speculative risks. insurable risks are generally classified as pure, objective, and diversafiable*
How does subjective and objective risk differ? - CORRECT ANSWER ✔ - subjective risk - perceived
amount of risk based on individuals or organizations opinion
Objective risk - measurable variation in uncertain outcomes based on facts and data
Where they differ (see page 1.8):
1. Familiarity and control
2. Consequences over likelihood
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CPCU 500
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3. Risk Awareness
Contracts diversifiable and nondiversifiable risk? - CORRECT ANSWER ✔ - diversifiable risk - is not highly
correlated and can be managed through diversification
Non-d risk - is correlated, losses and gains occur together (type: systemic risk - potential for a major
disruption in the function of an entire market or financial system
Describe the quadrants of risk - CORRECT ANSWER ✔ - way of categorizing risk is putting them in
quadrants:
-hazard risk - property, liability, and personnel loss, generally the subject of insurance
-operational risks - fall outside hazard cat, arise from people or failure in process, system, or control,
including info tech
-financial risks - effect of market forces on financial assets or liabilities and include market risk, credit
risk, liquidity risk and price risk
-strategic risks - arise from trends in the economy and society, including changes in econ, political and
competitive environments, as well as from demographic shirts
*see graph on 1.10*
What are the 3 components to constitute the financial consequence of risk faced by individuals or
organizations? - CORRECT ANSWER ✔ - - expected cost of losses or gains
- Expenditures on RM
- cost of residual uncertainty
What are hidden costs that can affect an organization's calculation of expected costs of loss? - CORRECT
ANSWER ✔ - -time lost by the injured employee
-time lost by other employees who stop work
-time lost by foremen, supervisors or other execs
-time spent on the case by first-aid attendants and hospital department staff
-damage to equipment
-interference with production
-continuation of injured employees’ wages
-loss of profit on injured employees productivity and on idle machines
-lost productivity because of employees excitement or weakened moral from the accident
-overhead per injured employee that continues while the employee is not productive
What are the costs of residual uncertainty? - CORRECT ANSWER ✔ - residual uncertainty is the level of
risk that remains after individuals or organizations implement their RM programs
-cost of this uncertainty is hard to measure
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CPCU 500
©®
CPCU 500 - Foundations of Risk Management &
Insurance Questions And Answers
What are the two elements of risk? - CORRECT ANSWER ✔ - -Uncertainty of outcome - Time of the
outcome and type of outcome are uncertain
-Possibility of a negative outcome - at least 1 outcome is negative
What is the difference between probability and possibility? - CORRECT ANSWER ✔ - Possibility - an
outcome or event may or may not occur. It does not quantify the risk, only verifies the risk is there
Probability - the likelihood than an outcome will occur, quantifies the risk. It is measurable and has value
between zero and one
How does probability help an organizations risk management exposure? - CORRECT ANSWER ✔ - -by
understanding the probability of an exposure, an organization can focus its risk management efforts to
avoid it.
-helps organization decided what projects and activities to undertake
How does classifying a risk help an organizations risk management process? - CORRECT ANSWER ✔ - -
can help with assessing risk cause many risks in the same classification have similar attributes
-helps manage risks
-helps administrative function of RM by helping to ensure the risks in same class are less likely to be
overlooked
Compare pure risk with speculative risk, why is it important to distinguish between the 2 what making
risk management procedures - CORRECT ANSWER ✔ - pure risk - change of loss or no loss but no gain.
Speculative risk - involves a chance of gain. Type of SR includes: price risk and credit risk (financial
investments involve a distinct set of speculative risks). It’s important when making RM decisions cause
the 2 types must often be managed different. *most insurance policies are not designed to handle
speculative risks. insurable risks are generally classified as pure, objective, and diversafiable*
How does subjective and objective risk differ? - CORRECT ANSWER ✔ - subjective risk - perceived
amount of risk based on individuals or organizations opinion
Objective risk - measurable variation in uncertain outcomes based on facts and data
Where they differ (see page 1.8):
1. Familiarity and control
2. Consequences over likelihood
Page | 1
CPCU 500
©®
, CPCU 500
3. Risk Awareness
Contracts diversifiable and nondiversifiable risk? - CORRECT ANSWER ✔ - diversifiable risk - is not highly
correlated and can be managed through diversification
Non-d risk - is correlated, losses and gains occur together (type: systemic risk - potential for a major
disruption in the function of an entire market or financial system
Describe the quadrants of risk - CORRECT ANSWER ✔ - way of categorizing risk is putting them in
quadrants:
-hazard risk - property, liability, and personnel loss, generally the subject of insurance
-operational risks - fall outside hazard cat, arise from people or failure in process, system, or control,
including info tech
-financial risks - effect of market forces on financial assets or liabilities and include market risk, credit
risk, liquidity risk and price risk
-strategic risks - arise from trends in the economy and society, including changes in econ, political and
competitive environments, as well as from demographic shirts
*see graph on 1.10*
What are the 3 components to constitute the financial consequence of risk faced by individuals or
organizations? - CORRECT ANSWER ✔ - - expected cost of losses or gains
- Expenditures on RM
- cost of residual uncertainty
What are hidden costs that can affect an organization's calculation of expected costs of loss? - CORRECT
ANSWER ✔ - -time lost by the injured employee
-time lost by other employees who stop work
-time lost by foremen, supervisors or other execs
-time spent on the case by first-aid attendants and hospital department staff
-damage to equipment
-interference with production
-continuation of injured employees’ wages
-loss of profit on injured employees productivity and on idle machines
-lost productivity because of employees excitement or weakened moral from the accident
-overhead per injured employee that continues while the employee is not productive
What are the costs of residual uncertainty? - CORRECT ANSWER ✔ - residual uncertainty is the level of
risk that remains after individuals or organizations implement their RM programs
-cost of this uncertainty is hard to measure
Page | 2
CPCU 500
©®
