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CPCU 500 QUESTIONS WITH DETAILED
VERIFIED ANSWERS
Economy of Operations Ans: increase departmental and organizational
efficiency, pre-loss risk mgmt goal
Toerable uncertainty Ans: provide an awareness of potential losses and
an assurance of their effective management keeping the worry of
accidental loss at a tolerable level (pre-loss risk mgmt goal)
Survival Ans: resume operations eventually (post loss risk mgmt goal)
Continuity of operations Ans: resume operations quickly (post loss risk
mgmt goal)
Profitability Ans: maintain at least a minimum profit level NO MATTER
WHAT accident occurs. Post loss risk mgmt goals
Earnings stability Ans: maintain a specified earnings level from year to
year post loss rm goal
Minimize the effects of loss on society for moral and good public reasons
Ans: social responsibility
maintain the pre-loss growth pattern Ans: growth post loss rm goal
6 STEPS OF THE RM PROCESS Ans: 1) IDENTIFY EXPOSURES
2) ANALYZE (MEASURE) LOSS EXPOSURES
3) EVALUATE ALTERNATIVE RM EXPOSURE TREATMENT TECHNIQUES
4) SELECT THE BEST COMBINATION OF RM TECHNIQUES
5) IMPLEMENT DECISION
6) MONITOR THE PROGRAM
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4 methods of loss exposure identification Ans: 1) Document analysis
2) Compliance review
3) Personal inspections
4) Experts
Hazard analysis Ans: under the experts method of loss exposures
identification, reveals potential losses by IDing conditions that increase
expected loss frequency and/or severity
Probability Ans: measures the expected frequency of an event over time
in a stable environment
Impossible events have a probability of Ans: 0
Certain events have a probability of Ans: 1
Theoretical probability Ans: theoretical and constant, calculated without
actual trials (coin toss)
Empirical probability Ans: practical and changeable, the law of large
numbers applies
Empirical probability Ans: computed from historical data from study
samples (mortality rates)
Factors that improve the reliability of empirical probabilities: Ans: use of
a large number of data, an organization with stable operations and loss
patterns
The smaller the standard deviation, Ans: the smaller the degree of
dispersion and the greater the accuracy of predictions.
Risk managers use standard deviation to measure Ans: the confidence
in projecting losses
Coefficient of variation Ans: compares the degree of dispersion between
2 data sets w/ substantially different means
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equals the std dev/mean
2 dimensions of timing Ans: when losses occur
when payments are made
The Prouty Approach Ans: method of jointly analyzing the frequency and
severity of a loss exposure
evaluates the significance of a particular loss exposure in terms of
possible combinations of expected loss frequency and severity
Prouty's 4 categories of loss frequency Ans: 1) Almost nil- extremely
unlikely to occur
2) Slight- could occur, but hasn't
3) Moderate- occurs occasionally
4) Definite- occurs regularly
Prouty's 3 categories of loss severity Ans: 1) slight- losses that can be
retained easily
2) significant- part of the loss must be transferred
3) severe- the organization's survival depends on the transfer of loss
5 loss exposure treatment methods Ans: 1) avoidance
2) retention
3) transfer
4) prevention
5) control (reduce or prevent a loss)
Total claims distribution Ans: 1 of 2 methods of jointly analyzing the
frequency and severity of a loss exposure
CPCU 500 QUESTIONS WITH DETAILED
VERIFIED ANSWERS
Economy of Operations Ans: increase departmental and organizational
efficiency, pre-loss risk mgmt goal
Toerable uncertainty Ans: provide an awareness of potential losses and
an assurance of their effective management keeping the worry of
accidental loss at a tolerable level (pre-loss risk mgmt goal)
Survival Ans: resume operations eventually (post loss risk mgmt goal)
Continuity of operations Ans: resume operations quickly (post loss risk
mgmt goal)
Profitability Ans: maintain at least a minimum profit level NO MATTER
WHAT accident occurs. Post loss risk mgmt goals
Earnings stability Ans: maintain a specified earnings level from year to
year post loss rm goal
Minimize the effects of loss on society for moral and good public reasons
Ans: social responsibility
maintain the pre-loss growth pattern Ans: growth post loss rm goal
6 STEPS OF THE RM PROCESS Ans: 1) IDENTIFY EXPOSURES
2) ANALYZE (MEASURE) LOSS EXPOSURES
3) EVALUATE ALTERNATIVE RM EXPOSURE TREATMENT TECHNIQUES
4) SELECT THE BEST COMBINATION OF RM TECHNIQUES
5) IMPLEMENT DECISION
6) MONITOR THE PROGRAM
, Page | 2
4 methods of loss exposure identification Ans: 1) Document analysis
2) Compliance review
3) Personal inspections
4) Experts
Hazard analysis Ans: under the experts method of loss exposures
identification, reveals potential losses by IDing conditions that increase
expected loss frequency and/or severity
Probability Ans: measures the expected frequency of an event over time
in a stable environment
Impossible events have a probability of Ans: 0
Certain events have a probability of Ans: 1
Theoretical probability Ans: theoretical and constant, calculated without
actual trials (coin toss)
Empirical probability Ans: practical and changeable, the law of large
numbers applies
Empirical probability Ans: computed from historical data from study
samples (mortality rates)
Factors that improve the reliability of empirical probabilities: Ans: use of
a large number of data, an organization with stable operations and loss
patterns
The smaller the standard deviation, Ans: the smaller the degree of
dispersion and the greater the accuracy of predictions.
Risk managers use standard deviation to measure Ans: the confidence
in projecting losses
Coefficient of variation Ans: compares the degree of dispersion between
2 data sets w/ substantially different means
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equals the std dev/mean
2 dimensions of timing Ans: when losses occur
when payments are made
The Prouty Approach Ans: method of jointly analyzing the frequency and
severity of a loss exposure
evaluates the significance of a particular loss exposure in terms of
possible combinations of expected loss frequency and severity
Prouty's 4 categories of loss frequency Ans: 1) Almost nil- extremely
unlikely to occur
2) Slight- could occur, but hasn't
3) Moderate- occurs occasionally
4) Definite- occurs regularly
Prouty's 3 categories of loss severity Ans: 1) slight- losses that can be
retained easily
2) significant- part of the loss must be transferred
3) severe- the organization's survival depends on the transfer of loss
5 loss exposure treatment methods Ans: 1) avoidance
2) retention
3) transfer
4) prevention
5) control (reduce or prevent a loss)
Total claims distribution Ans: 1 of 2 methods of jointly analyzing the
frequency and severity of a loss exposure
