Page | 1
CFP FP512 REVIEW SET QUESTIONS
WITH DETAILED VERIFIED ANSWERS
Abandonment Ans: Represents the possibility of a loss—or a negative
deviation from a desired outcome.
Peril Ans: is the cause of a loss
Hazard Ans: Increases the potential for loss
Static Risks Ans: Such as earthquakes and floods, result from factors
other than changes in the economy. They tend to occur with regularity
and can be insured.
Dynamic Risks Ans: Are the result of changes in the economy, such as
changes in the business cycle or inflation. Insurance does not typically
cover these types of risks.
Fundamental Risks Ans: affect a large group of people. Examples include
recessions and earthquakes.
Particular Risks Ans: affect individuals or small groups of people
Pure risk Ans: Involves only the chance of loss or no loss; in other
words, there is no chance of gain. The possibility that a person's home
will burn represents this type of risk because there is no chance of gain
but only the chance of loss or no loss.
Speculative Risk Ans: Involves both the chance of loss and the chance of
gain. Gambling is a classic example of this risk because it presents both
the chance of loss and the chance of gain.
Risk Management Process Ans: Step 1: Identify and Establish Risk
Management Goals
Step 2: Gather pertinent data to determine risk exposures
, Page | 2
Step 3: Analyze and evaluate the information to identify risk exposures
Step 4: Develop a risk management plan
Step 5: Communicate the Recommendations
Step 6: Implement the recommendations
Step 7: Monitor the recommendations for needed changes
Asset related risk exposure Ans: loss of the asset itself, loss of use of
the asset, and other associated losses.
Contract Law Ans: the risk of liability in acquisition of an asset based on
law: acquisition of an asset resulting in liability to a lender, a club
membership contract putting certain responsibilities on the client, etc.
Tort Law Ans: Liability for a loss resulting from the use of an asset or
from an activity—a boating accident, practicing one's profession, etc.
Risk Control Ans: Is a risk management technique that seeks to
minimize the risk of loss.
Risk Avoidance Ans: If a business wants to ensure that it will not have
windows broken by vandals, it can avoid the risk by not having
windows... What kind of risk method does this describe?
Risk Reduction Ans: If the same business wants windows but is still
concerned about vandals, it may choose to have windows made of a
material that is very difficult to break... What kind of risk method does
this describe?
Risk Financing Ans: is a risk management technique that pays the costs
of losses incurred
Risk Retention Ans: There are situations where the potential loss is
small and the business or individual believes any losses that occur can be
covered out of pocket.
, Page | 3
Risk Transfer Ans: This is primarily insurance, but can also be
accomplished through waivers or subcontracting. This describes giving
risk to an insurance company in exchange for a relatively small cost, the
premium. Health, life, disability, and liability risks are examples
Risk Retention Ans: A strategy in which an entity sets aside a sum as a
protection against a probable loss, instead of transferring the risk by
purchasing an insurance policy.
Self Insurance Ans: A form of risk management whereby a part of the
firm's earnings is earmarked as a contingency fund for possible future
losses, specifically for individual loss categories such as property,
medical, or worker's compensation.
Insurable risk Ans: a pure risk that is faced by a large number of people
and for which the amount of the loss can be predicted
Law of large numbers Ans: There must be a large number of similar
potential losses so that the insurer can reasonably apportion the
expected financial loss.
Insurable interest Ans: Any financial interest in life or property such
that, if the life or property were lost or harmed, the insured would suffer
financially
Actual Cash Value Ans: replacement cost minus depreciation
Other Insurance Ans: This provision states that when a loss occurs, and
there is more than one insurance policy covering the same loss, the
insured will not profit from the loss.
Coinsurance Ans: may be a splitting of costs, or it may refer to a
minimum percentage of insurance that is required to avoid being
penalized for inadequate property insurance when there are partial
losses.
Deductible Ans: is a retained risk. It is the portion of insured losses that
the insured is expected to pay before the insurance company pays
anything.
CFP FP512 REVIEW SET QUESTIONS
WITH DETAILED VERIFIED ANSWERS
Abandonment Ans: Represents the possibility of a loss—or a negative
deviation from a desired outcome.
Peril Ans: is the cause of a loss
Hazard Ans: Increases the potential for loss
Static Risks Ans: Such as earthquakes and floods, result from factors
other than changes in the economy. They tend to occur with regularity
and can be insured.
Dynamic Risks Ans: Are the result of changes in the economy, such as
changes in the business cycle or inflation. Insurance does not typically
cover these types of risks.
Fundamental Risks Ans: affect a large group of people. Examples include
recessions and earthquakes.
Particular Risks Ans: affect individuals or small groups of people
Pure risk Ans: Involves only the chance of loss or no loss; in other
words, there is no chance of gain. The possibility that a person's home
will burn represents this type of risk because there is no chance of gain
but only the chance of loss or no loss.
Speculative Risk Ans: Involves both the chance of loss and the chance of
gain. Gambling is a classic example of this risk because it presents both
the chance of loss and the chance of gain.
Risk Management Process Ans: Step 1: Identify and Establish Risk
Management Goals
Step 2: Gather pertinent data to determine risk exposures
, Page | 2
Step 3: Analyze and evaluate the information to identify risk exposures
Step 4: Develop a risk management plan
Step 5: Communicate the Recommendations
Step 6: Implement the recommendations
Step 7: Monitor the recommendations for needed changes
Asset related risk exposure Ans: loss of the asset itself, loss of use of
the asset, and other associated losses.
Contract Law Ans: the risk of liability in acquisition of an asset based on
law: acquisition of an asset resulting in liability to a lender, a club
membership contract putting certain responsibilities on the client, etc.
Tort Law Ans: Liability for a loss resulting from the use of an asset or
from an activity—a boating accident, practicing one's profession, etc.
Risk Control Ans: Is a risk management technique that seeks to
minimize the risk of loss.
Risk Avoidance Ans: If a business wants to ensure that it will not have
windows broken by vandals, it can avoid the risk by not having
windows... What kind of risk method does this describe?
Risk Reduction Ans: If the same business wants windows but is still
concerned about vandals, it may choose to have windows made of a
material that is very difficult to break... What kind of risk method does
this describe?
Risk Financing Ans: is a risk management technique that pays the costs
of losses incurred
Risk Retention Ans: There are situations where the potential loss is
small and the business or individual believes any losses that occur can be
covered out of pocket.
, Page | 3
Risk Transfer Ans: This is primarily insurance, but can also be
accomplished through waivers or subcontracting. This describes giving
risk to an insurance company in exchange for a relatively small cost, the
premium. Health, life, disability, and liability risks are examples
Risk Retention Ans: A strategy in which an entity sets aside a sum as a
protection against a probable loss, instead of transferring the risk by
purchasing an insurance policy.
Self Insurance Ans: A form of risk management whereby a part of the
firm's earnings is earmarked as a contingency fund for possible future
losses, specifically for individual loss categories such as property,
medical, or worker's compensation.
Insurable risk Ans: a pure risk that is faced by a large number of people
and for which the amount of the loss can be predicted
Law of large numbers Ans: There must be a large number of similar
potential losses so that the insurer can reasonably apportion the
expected financial loss.
Insurable interest Ans: Any financial interest in life or property such
that, if the life or property were lost or harmed, the insured would suffer
financially
Actual Cash Value Ans: replacement cost minus depreciation
Other Insurance Ans: This provision states that when a loss occurs, and
there is more than one insurance policy covering the same loss, the
insured will not profit from the loss.
Coinsurance Ans: may be a splitting of costs, or it may refer to a
minimum percentage of insurance that is required to avoid being
penalized for inadequate property insurance when there are partial
losses.
Deductible Ans: is a retained risk. It is the portion of insured losses that
the insured is expected to pay before the insurance company pays
anything.
