CPCU 500 Exam Questions and Answers Grade A+
Classify each of the following risks as pure or speculative, subjective, or objective, and
diversifiable or nondiversifiable.
A. Damage to an office building resulting from a hurricane
B. Reduction in value of retirement savings
C. Products liability claim against a manufacturer - Answer-A. Pure sunjective and objective non
diversifiable
B. Speculative subjective and objective diversifiable
C. Pure subjective and objective diversifiable
Identify three components that constitute the financial consequences of risk faced by
individuals or organizations - Answer-Expected cost of losses or gains
Expenditures on risk management
Cost of residual uncertainty
List hidden costs that can affect an organizations calculation of expected costs of loss - Answer--
time lost by the injured employee
-time lost by other employees who stop work
-time lost by foreman, supervisors, or other executives
- time spent on the case by first-aid attendants and hospital department staff (when not paid for
by the insurer)
-damage to the machine, tools, or other property or the spoilage of material
-interference with production, failure to fill orders on time, loss of bonuses, payment of forfeits,
and other similar causes of loss
-continuation of the injured employees wages in full after the employees return to work-even
though the employees services may be temporarily worth less than normal value
-loss of profit on the injured employees productivity and on the idle machines
-lost productivity because of employee excitement or weakened morale resulting from the
accident
,-overhead per injured employee, that is, the expense of light, heat, rent, and other items that
continue while the injured employee is not productive
Describe the costs of residual uncertainty - Answer-Residual uncertainty is the level of risk that
remains after individuals or organization's implement,net their risk management programs. The
cost of this uncertainty is hard to measure but still may significantly affect the individual or
organization. For individuals, the cost of residual uncertainty may include lost salary or forgone
investment opportunities. For organizations, the cost of residual uncertainty includes the effect
that uncertainty has on consumers, investors, and suppliers. For example, suppliers may be less
willing to sell supplies on credit to organization's with large amounts of residual uncertainty.
Mary has purchased a vacation home located in coastal region of south Florida. Give examples
of each of the three financial consequences of risk that Mary is now exposed to with this
purchase. - Answer-Expected cost of losses or gains - the value of the home may increase
overtime. It may also get hit by a hurricane and destroyed. Because of the homes exposure to
loss from fire, flood, and hurricane damage Mary can expect to suffer losses to both the real
property and the personal property
Expenditures on risk management - she will need to buy insurance and maintain the home.
Mary may choose to install hurricane shutters, hurricane roof straps, and other risk control
items to reduce the amount of loss that may occur during a hurricane.
Cost of residual uncertainty - she might not be able to find insurance because of the high risk of
a hurricane. Mary now has uncertainty regarding the causes, frequency, and severity of loss to
her new property. Although her risk control efforts can mitigate any losses and she has
purchased homeowners insurance Mary will still have some uninsured costs associated with any
loss
Explain how risk management practices differ between individuals and organizations - Answer-
For individuals, risk management is usually an informal series of efforts not a formalized
process. In smaller organization's, risk management is not usually a dedicated function, but one
of many tasks carried out by the owner or senior manager. In many larger organizations, risk
management function is conducted as part of a formalized risk management program.
Describe the difference in scope between traditional risk management and enterprise wide risk
management. - Answer-Traditionally the risk management professionals role has been
associated with loss exposures related mainly to pure, as opposed to speculative, risks.
Enterprise wide risk management is the broader view of risk management that encompasses all
types of risk. ERM is an approach to managing all of an organization's key risks and
opportunities with the intent of maximizing the organization's value.
, Explain how the focus of risk management efforts differs for traditional risk management and
enterprise wide risk management - Answer-Traditional focuses on managing safety, purchasing
insurance, and controlling financial recovery from losses generated by hazard risk.
ERM is an approach to managing all of an organization's key risks and opportunities with the
intent of maximizing the organization's value.
Hazard - Answer-A condition that increases the frequency or severity of a loss
Moral hazard - Answer-A condition that increases the likelihood that a person will intentionally
cause or exaggerate a loss.
Morale hazard (attitudinal hazard) - Answer-A condition of carelessness or indifference that
increases the frequency or severity of loss
Physical hazard - Answer-A tangible characteristic of property, persons, or operations that tends
to increase the frequency or severity of of loss.
Legal hazard - Answer-A condition of the legal environment that increases loss frequency or
severity
Property loss exposure - Answer-A condition that presents the possibility that a person or an
organization will sustain a loss resulting from damage (including destruction, taking, or loss of
use) to property in which that person or organization had a financial interest
Tangible property - Answer-Property that has a physical form.
Real property (realty) - Answer-Tangible property consisting of land, all structures permanently
attached to the lad, and whatever is growing on the land
Personal property - Answer-All tangible or intangible property that is not real property
Intangible property - Answer-Property that has no physical form
Liability loss exposures - Answer-Any condition or situation that presents the possibility of a
claim alleging legal responsibility of a person or business for injury or damage suffered by
another party.
Personnel loss exposure - Answer-A condition that presents the possibility of loss caused by a
persons death, disability, retirement, or resignation that deprives an organization of the persons
special skill or knowledge that the organization cannot readily replace
Personal loss exposure - Answer-Any condition or situation that presents the possibility of a
financial loss to an individual or a family by such causes as death, sickness, injury, or
unemployment.
Classify each of the following risks as pure or speculative, subjective, or objective, and
diversifiable or nondiversifiable.
A. Damage to an office building resulting from a hurricane
B. Reduction in value of retirement savings
C. Products liability claim against a manufacturer - Answer-A. Pure sunjective and objective non
diversifiable
B. Speculative subjective and objective diversifiable
C. Pure subjective and objective diversifiable
Identify three components that constitute the financial consequences of risk faced by
individuals or organizations - Answer-Expected cost of losses or gains
Expenditures on risk management
Cost of residual uncertainty
List hidden costs that can affect an organizations calculation of expected costs of loss - Answer--
time lost by the injured employee
-time lost by other employees who stop work
-time lost by foreman, supervisors, or other executives
- time spent on the case by first-aid attendants and hospital department staff (when not paid for
by the insurer)
-damage to the machine, tools, or other property or the spoilage of material
-interference with production, failure to fill orders on time, loss of bonuses, payment of forfeits,
and other similar causes of loss
-continuation of the injured employees wages in full after the employees return to work-even
though the employees services may be temporarily worth less than normal value
-loss of profit on the injured employees productivity and on the idle machines
-lost productivity because of employee excitement or weakened morale resulting from the
accident
,-overhead per injured employee, that is, the expense of light, heat, rent, and other items that
continue while the injured employee is not productive
Describe the costs of residual uncertainty - Answer-Residual uncertainty is the level of risk that
remains after individuals or organization's implement,net their risk management programs. The
cost of this uncertainty is hard to measure but still may significantly affect the individual or
organization. For individuals, the cost of residual uncertainty may include lost salary or forgone
investment opportunities. For organizations, the cost of residual uncertainty includes the effect
that uncertainty has on consumers, investors, and suppliers. For example, suppliers may be less
willing to sell supplies on credit to organization's with large amounts of residual uncertainty.
Mary has purchased a vacation home located in coastal region of south Florida. Give examples
of each of the three financial consequences of risk that Mary is now exposed to with this
purchase. - Answer-Expected cost of losses or gains - the value of the home may increase
overtime. It may also get hit by a hurricane and destroyed. Because of the homes exposure to
loss from fire, flood, and hurricane damage Mary can expect to suffer losses to both the real
property and the personal property
Expenditures on risk management - she will need to buy insurance and maintain the home.
Mary may choose to install hurricane shutters, hurricane roof straps, and other risk control
items to reduce the amount of loss that may occur during a hurricane.
Cost of residual uncertainty - she might not be able to find insurance because of the high risk of
a hurricane. Mary now has uncertainty regarding the causes, frequency, and severity of loss to
her new property. Although her risk control efforts can mitigate any losses and she has
purchased homeowners insurance Mary will still have some uninsured costs associated with any
loss
Explain how risk management practices differ between individuals and organizations - Answer-
For individuals, risk management is usually an informal series of efforts not a formalized
process. In smaller organization's, risk management is not usually a dedicated function, but one
of many tasks carried out by the owner or senior manager. In many larger organizations, risk
management function is conducted as part of a formalized risk management program.
Describe the difference in scope between traditional risk management and enterprise wide risk
management. - Answer-Traditionally the risk management professionals role has been
associated with loss exposures related mainly to pure, as opposed to speculative, risks.
Enterprise wide risk management is the broader view of risk management that encompasses all
types of risk. ERM is an approach to managing all of an organization's key risks and
opportunities with the intent of maximizing the organization's value.
, Explain how the focus of risk management efforts differs for traditional risk management and
enterprise wide risk management - Answer-Traditional focuses on managing safety, purchasing
insurance, and controlling financial recovery from losses generated by hazard risk.
ERM is an approach to managing all of an organization's key risks and opportunities with the
intent of maximizing the organization's value.
Hazard - Answer-A condition that increases the frequency or severity of a loss
Moral hazard - Answer-A condition that increases the likelihood that a person will intentionally
cause or exaggerate a loss.
Morale hazard (attitudinal hazard) - Answer-A condition of carelessness or indifference that
increases the frequency or severity of loss
Physical hazard - Answer-A tangible characteristic of property, persons, or operations that tends
to increase the frequency or severity of of loss.
Legal hazard - Answer-A condition of the legal environment that increases loss frequency or
severity
Property loss exposure - Answer-A condition that presents the possibility that a person or an
organization will sustain a loss resulting from damage (including destruction, taking, or loss of
use) to property in which that person or organization had a financial interest
Tangible property - Answer-Property that has a physical form.
Real property (realty) - Answer-Tangible property consisting of land, all structures permanently
attached to the lad, and whatever is growing on the land
Personal property - Answer-All tangible or intangible property that is not real property
Intangible property - Answer-Property that has no physical form
Liability loss exposures - Answer-Any condition or situation that presents the possibility of a
claim alleging legal responsibility of a person or business for injury or damage suffered by
another party.
Personnel loss exposure - Answer-A condition that presents the possibility of loss caused by a
persons death, disability, retirement, or resignation that deprives an organization of the persons
special skill or knowledge that the organization cannot readily replace
Personal loss exposure - Answer-Any condition or situation that presents the possibility of a
financial loss to an individual or a family by such causes as death, sickness, injury, or
unemployment.
