CPCU 551 Questions and Correct
Detailed Answers
An example of an administrative expense that can minimize the cost of risk is - Answer: Risk
management consulting
The availability of funds to pay for losses is most important to organizations when - Answer:
Operations have been disrupted
A self-supporting solid wall that prevents a fire from passing through or around it is a - Answer: Fire
wall
A building with concrete exterior walls and wooden support beams as defined by Insurance Services
Office, Inc. (ISO) - Answer: Joisted masonry
The analysis step of the risk management process involves considering the four dimensions of a loss
exposure. If any of these dimensions of loss exposure analysis involve empirical distributions
developed from past losses, what needs to be determined? - Answer: The credibility of the data
being used
In theory, liability losses are limited only by the - Answer: Defendant's total wealth
Customer Mary gave dry cleaner Ike her fur coat so he could remove a large stain. Ike could not
eliminate the stain so he asked restoration specialist Peter to attempt to remove it. The bailor in this
scenario is - Answer: Mary
Jack and Susan own and manage a hotel. They are concerned about their responsibility for the
property of their guests and whether they have an insurable interest in that property and thus could
buy insurance to cover their responsibility. Most courts would hold that they do have an insurable
interest in their guests' property based on the legal basis of - Answer: Exposure to legal liability
What is the primary advantage of using retention as a risk financing measure to help an organization
meet its risk financing goals? - Answer: Managing the cost of risk
,One way of jointly considering frequency and severity is to combine both frequency and severity into
- Answer: A total claims distribution
What type of captive typically operates as a formalized retention plan rather than a transfer
measure? - Answer: Single-parent captive
What is correct with respect to retention's ability to meet risk financing goals? - Answer: Retention
enables an organization to manage its cost of risk
Martin enters a warehouse by smashing a basement window and climbing through the opening. He
steals supplies and a box of petty cash and exits the building through the same window. This is an
example of what type of theft? - Answer: Burglary
If the organization wishes to pre-fund for retained future losses, it must determine the present value
of the expected future losses. Calculating the present value of a future amount is known as - Answer:
Discounting
What is used for a rating plan whereby the insured receives a premium reduction for agreeing to
reimburse the insurer for losses up to a substantial per accident or per occurrence limit? - Answer:
Large deductible plan
Many states require a self-insurer to - Answer: Purchase excess insurance
In insurance terminology, trucks, trailers, buses, fire engines, and ambulances designed for road use
are examples of what category of motor vehicle? - Answer: Autos
Perils are an important aspect of property insurance. What is correct with respect to perils? -
Answer: A peril is the actual means by which property is damaged or destroyed such as fire,
lightning, windstorm, hail or theft.
A commercial building may contain furniture, machinery and equipment, raw materials, and finished
products. What is the term generally used in property insurance policies to refer to all these types of
property? - Answer: Business personal property
What is a characteristic of an organization that would be more appropriate for risk transfer than risk
retention? - Answer: Weak financial condition
,To achieve the financial goal of maximizing market value, most publicly traded organizations should
pursue risk financing goals. Common risk financing goals include - Answer: Managing uncertainty of
loss outcomes
The best method of treating the loss exposure of flood when constructing a building is - Answer:
Locating in an area with no prior flood experience
A pool can meet the risk financing goal of minimizing the cost of risk through - Answer: Economies
of scale administration
What is true regarding the selection of appropriate risk financing measures? - Answer: It is typically
more economical for an organization to retain rather than transfer loss exposures directly related to
its core operations
Two of the most common applications of relative frequency measures in risk management are
injuries per person per hour in works compensation and - Answer: Auto accidents per mile driven
What is correct with respect to retrospective rating plans? - Answer: An organization must have a
substantial insurance premium to benefit from retrospective rating
What is correct with respect to the timing dimension in the analysis of loss exposures? - Answer:
Money held in reserve to pay for a loss can earn interest until the actual payment is made
Each insured member of a pool contributes premium based on its loss exposures. In exchange, -
Answer: The pool pays for each insured's covered losses
Ships and their cargoes represent a special category of property insurance. What is correct with
respect to this category? - Answer: Even more than other property, ocean cargoes fluctuate in value
according to their location
In insurance terminology, equipment such as tractors, bulldozers, road graders, front-end loaders,
and forklifts designed primarily for off-road use are considered to be - Answer: Mobile equipment
, Sandi purchased a $130,000 home three years ago and took out a $100,000 mortgage. Today her
home is worth $150,000 and she still owes $55,000 on the home. The mortgage holder has an
insurable interest of how much in Sandi's home? - Answer: $55,000
A hazard is defined as - Answer: Anything that increases the frequency or the severity of a loss
Charlotte, Chloe, and Jessica have concurrent ownership in a restaurant, each owning one third.
Their combined interests equal the value of the restaurant. If one of them should die, her share
would pass to her heirs. This type of ownership is referred to as - Answer: Tenancy in common
Securing outside materials and maintaining roof tie-downs are risk control measures particularly
important for the peril of - Answer: Windstorm
One dimension of analyzing loss exposures is timing of losses. The timing of losses is significant
because - Answer: Money held in reserve to pay for a loss can earn interest until the actual payment
is made
A risk financing goal is - Answer: Managing uncertainty of loss outcomes
When analyzing loss exposures, total dollar losses can be determined by multiplying loss frequency
by - Answer: Loss severity
In loss analysis, the Prouty approach primarily involves - Answer: Loss frequency and severity
What is true regarding the risk financing goal of maintaining an appropriate level of liquidity? -
Answer: Both the amount of cash to pay for retained losses and the timing of the payments are
important in deciding on an appropriate level of liquidity.
Captive insurers are - Answer: Sometimes used to insure property loss exposures that are difficult to
insure in the primary market
Jeremy is a bailee who insures bailor Sam's property for Sam's benefit. Jeremy has an insurable
interest in the property, but if Sam's property becomes damaged or destroyed, Jeremy - Answer:
Pays any awarded insurance proceeds to Sam
Detailed Answers
An example of an administrative expense that can minimize the cost of risk is - Answer: Risk
management consulting
The availability of funds to pay for losses is most important to organizations when - Answer:
Operations have been disrupted
A self-supporting solid wall that prevents a fire from passing through or around it is a - Answer: Fire
wall
A building with concrete exterior walls and wooden support beams as defined by Insurance Services
Office, Inc. (ISO) - Answer: Joisted masonry
The analysis step of the risk management process involves considering the four dimensions of a loss
exposure. If any of these dimensions of loss exposure analysis involve empirical distributions
developed from past losses, what needs to be determined? - Answer: The credibility of the data
being used
In theory, liability losses are limited only by the - Answer: Defendant's total wealth
Customer Mary gave dry cleaner Ike her fur coat so he could remove a large stain. Ike could not
eliminate the stain so he asked restoration specialist Peter to attempt to remove it. The bailor in this
scenario is - Answer: Mary
Jack and Susan own and manage a hotel. They are concerned about their responsibility for the
property of their guests and whether they have an insurable interest in that property and thus could
buy insurance to cover their responsibility. Most courts would hold that they do have an insurable
interest in their guests' property based on the legal basis of - Answer: Exposure to legal liability
What is the primary advantage of using retention as a risk financing measure to help an organization
meet its risk financing goals? - Answer: Managing the cost of risk
,One way of jointly considering frequency and severity is to combine both frequency and severity into
- Answer: A total claims distribution
What type of captive typically operates as a formalized retention plan rather than a transfer
measure? - Answer: Single-parent captive
What is correct with respect to retention's ability to meet risk financing goals? - Answer: Retention
enables an organization to manage its cost of risk
Martin enters a warehouse by smashing a basement window and climbing through the opening. He
steals supplies and a box of petty cash and exits the building through the same window. This is an
example of what type of theft? - Answer: Burglary
If the organization wishes to pre-fund for retained future losses, it must determine the present value
of the expected future losses. Calculating the present value of a future amount is known as - Answer:
Discounting
What is used for a rating plan whereby the insured receives a premium reduction for agreeing to
reimburse the insurer for losses up to a substantial per accident or per occurrence limit? - Answer:
Large deductible plan
Many states require a self-insurer to - Answer: Purchase excess insurance
In insurance terminology, trucks, trailers, buses, fire engines, and ambulances designed for road use
are examples of what category of motor vehicle? - Answer: Autos
Perils are an important aspect of property insurance. What is correct with respect to perils? -
Answer: A peril is the actual means by which property is damaged or destroyed such as fire,
lightning, windstorm, hail or theft.
A commercial building may contain furniture, machinery and equipment, raw materials, and finished
products. What is the term generally used in property insurance policies to refer to all these types of
property? - Answer: Business personal property
What is a characteristic of an organization that would be more appropriate for risk transfer than risk
retention? - Answer: Weak financial condition
,To achieve the financial goal of maximizing market value, most publicly traded organizations should
pursue risk financing goals. Common risk financing goals include - Answer: Managing uncertainty of
loss outcomes
The best method of treating the loss exposure of flood when constructing a building is - Answer:
Locating in an area with no prior flood experience
A pool can meet the risk financing goal of minimizing the cost of risk through - Answer: Economies
of scale administration
What is true regarding the selection of appropriate risk financing measures? - Answer: It is typically
more economical for an organization to retain rather than transfer loss exposures directly related to
its core operations
Two of the most common applications of relative frequency measures in risk management are
injuries per person per hour in works compensation and - Answer: Auto accidents per mile driven
What is correct with respect to retrospective rating plans? - Answer: An organization must have a
substantial insurance premium to benefit from retrospective rating
What is correct with respect to the timing dimension in the analysis of loss exposures? - Answer:
Money held in reserve to pay for a loss can earn interest until the actual payment is made
Each insured member of a pool contributes premium based on its loss exposures. In exchange, -
Answer: The pool pays for each insured's covered losses
Ships and their cargoes represent a special category of property insurance. What is correct with
respect to this category? - Answer: Even more than other property, ocean cargoes fluctuate in value
according to their location
In insurance terminology, equipment such as tractors, bulldozers, road graders, front-end loaders,
and forklifts designed primarily for off-road use are considered to be - Answer: Mobile equipment
, Sandi purchased a $130,000 home three years ago and took out a $100,000 mortgage. Today her
home is worth $150,000 and she still owes $55,000 on the home. The mortgage holder has an
insurable interest of how much in Sandi's home? - Answer: $55,000
A hazard is defined as - Answer: Anything that increases the frequency or the severity of a loss
Charlotte, Chloe, and Jessica have concurrent ownership in a restaurant, each owning one third.
Their combined interests equal the value of the restaurant. If one of them should die, her share
would pass to her heirs. This type of ownership is referred to as - Answer: Tenancy in common
Securing outside materials and maintaining roof tie-downs are risk control measures particularly
important for the peril of - Answer: Windstorm
One dimension of analyzing loss exposures is timing of losses. The timing of losses is significant
because - Answer: Money held in reserve to pay for a loss can earn interest until the actual payment
is made
A risk financing goal is - Answer: Managing uncertainty of loss outcomes
When analyzing loss exposures, total dollar losses can be determined by multiplying loss frequency
by - Answer: Loss severity
In loss analysis, the Prouty approach primarily involves - Answer: Loss frequency and severity
What is true regarding the risk financing goal of maintaining an appropriate level of liquidity? -
Answer: Both the amount of cash to pay for retained losses and the timing of the payments are
important in deciding on an appropriate level of liquidity.
Captive insurers are - Answer: Sometimes used to insure property loss exposures that are difficult to
insure in the primary market
Jeremy is a bailee who insures bailor Sam's property for Sam's benefit. Jeremy has an insurable
interest in the property, but if Sam's property becomes damaged or destroyed, Jeremy - Answer:
Pays any awarded insurance proceeds to Sam
