CPCU 500- Becoming a Leader in Risk Management and Insurance Questions and Complete Solutions Graded A+

CPCU 500- Becoming a Leader in Risk Management and Insurance Questions and Complete Solutions Graded A+ Risk - Answer: uncertainty of outcomes The insurance industry is evolving as a result of two key, overarching factors that are influencing virtually every aspect of the insurance value chain: - Answer: the growing demand for risk management consulting new technology that's helping organizations predict and prevent losses Examples of Technology Used to Predict and Prevent Losses - Answer: Telematics- has greatly influenced vehicle and driver safety Wearables IoT Sensors Smartphones Cloud Storage Predictive Models Artificial Intelligence Law of Large Numbers - Answer: A mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases. Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to drive it to special events at schools around the country where it will serve as a mobile billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to insure his vehicle because it fails to meet one of the ideal characteristics of an insurable risk. Which characteristic is Oscar's vehicle least likely to meet? Smart Product - Answer: An innovative item that uses sensors; wireless sensor networks; and data collection, transmission, and analysis to further enable the item to be faster, more useful, or otherwise improved. Sensor - Answer: A device that detects and measures stimuli in its environment. Wireless sensor network (WSN) - Answer: A wireless network consisting of individual sensors placed at various locations to exchange data. Big data - Answer: Sets of data that are too large to be gathered and analyzed by traditional methods. Internet of Things (IoT) - Answer: A network of objects that transmit data to computers. Predictive analytics - Answer: Statistical and analytical techniques used to develop models that predict future events or behaviors. Data science - Answer: An interdisciplinary field involving the design and use of techniques to process very large amounts of data from a variety of sources and to provide knowledge based on the data. These decisions can have far-reaching effects across the insurance value chain: - Answer: Determining the appropriate coverage limits for an individual policy Choosing whether to have a prospective customer elaborate on information provided in an insurance application Deciding what data to include in a predictive model and where it should come from Determining whether a claim shows signs of fraud and should be reported to the special investigation unit (SIU) Deciding the best way to respond empathetically to a customer's claim Determining how to describe your ideal job candidate for an open position to a recruiter or hiring manager What's the difference between occurrence and claims-made coverage - Answer: Under an occurrence policy, coverage is triggered for losses that happen within the policy period, even if the policy has expired. Under a claims-made policy, coverage is triggered for claims that occur after the policy's coverage began (the retroactive date) and are reported within the policy's reporting period. social inflation - Answer: The increasing of insurance losses caused by higher jury awards, increase in liberal treatment of claims by workers compensation boards, legislated rises in compensation benefit levels (in some cases retroactively), and new concepts of tort and negligence, among others. These are some of the most common risk classifications - Answer: Pure and speculative risk Subjective and objective risk Diversifiable and nondiversifiable risk Quadrants of risk (hazard, operational, financial, and strategic) Several factors can affect speculative risk - Answer: Price risk—Uncertainty about cash flows resulting from possible changes in the cost of raw materials and other inputs (such as lumber, gas, or electricity), as well as cost-related changes in the market for completed products and other outputs. EXAMPLE- Four Grains Cereal Company signed a contract to deliver 250,000 boxes of cereal to a national supermarket chain at a specified price per box of cereal six months from today. Between now and when the grain to make the cereal is purchased, the cost of the grain may increase. If the cost of this important ingredient increases, the profitability of the transaction will be altered. This financial risk that Four Grains faces is Input Price- Uncertainty of the price of the resources used to produce an organization's product Output Price- Uncertainty regarding the price an organization can charge for its product Credit risk- risk that customers or other creditors will fail to make promised payments as they come due.—Although a credit risk is particularly significant for banks and other financial institutions, it can also be relevant to any organization with accounts receivable. Subjective and objective risks can differ in other ways as well: - Answer: Familiarity and control Consequences over likelihood Risk awareness Quadrants of Risk - Answer: Hazard risks—These arise from property, liability, or personnel loss exposures and are generally the subject of insurance. Operational risks—These fall outside the hazard risk category and arise from people or a failure in processes, systems, or controls, including those involving information technology. EXAMPLE- Jean is the Risk Manager for a Fortune 1000 company. Her CFO has tasked her to analyze vulnerabilities in the firm's supply chain. The adequacy of suppliers to meet an organization's needs would be an example of which one of the following types of risk? Financial risks—These risks arise from market forces on financial assets or liabilities and include market risk, credit risk, liquidity risk, and price risk. EXAMPLE- An organization practicing holistic risk management would assess the cost of raw materials and foreign exchange risk Strategic risks—These arise from trends in the economy and society, including changes in the economic, political, and competitive environments, as well as from demographic shifts. EXAMPLE- A new computer chip that could position a company for explosive growth is an example of EXAMPLE- Hardware Store has been able to control its prices and inventory since it has no competitors. A new highway currently being constructed is going to allow increased competition for Hardware Store. According to the quadrants of risk, this risk of increased competition falls into the category of the four quadrants of risk focus on the source of risk and who has traditionally managed it Which one of the following best describes the categories of risk included in the enterprise risk management model? Hazard, Operational, Financial, Strategic Pure risk - Answer: A chance of loss or no loss, but no chance of gain. Speculative risk - Answer: A chance of loss, no loss, or gain. Credit risk - Answer: The risk that customers or other creditors will fail to make promised payments as they come due. One financial risk for an insurer is that the insured will not pay all of the premiums when the premiums are due Subjective risk - Answer: The perceived amount of risk based on an individual's or organization's opinion. Subjective risk can exist even where objective risk does not EXAMPLE- Billy owns a beach front cottage which has become his primary residence. Billy's primary concern is that his home will be hit by a hurricane and badly damaged or even destroyed. For Billy, this hurricane risk is a subjective risk Objective risk - Answer: The measurable variation in uncertain outcomes based on facts and data. Diversifiable risk - Answer: A risk that affects only some individuals, businesses, or small groups. Systemic risk - Answer: The potential for a major disruption in the function of an entire market or financial system. Market risk - Answer: Uncertainty about an investment's future value because of potential changes in the market for that type of investment. Liquidity risk - Answer: The risk that an asset cannot be sold on short notice without incurring a loss. the risk management process - Answer: Scan the Environment- Scanning the environment includes evaluating how each of an organization's risk management processes aligns with its overall objectives Identify Risks- The goal of risk identification is to develop a comprehensive list of risks that could affect the organization. EXAMPLE- Company X hired a safety consultant to complete a walkthrough of their operations and advise them of any unsafe conditions or out-of-compliance procedures. Analyze Risks- Risk analysis involves applying the defined risk criteria to determine the source, cause, likelihood, and potential consequences of each identified risk. Depending on the circumstances, this analysis can be quantitative, qualitative, or both. Quantitative analysis, in particular, may entail interacting with experts. EXAMPLE- Company Z conducted a quantitative risk assessment examining the likelihood and consequences of the major risks to their company. Treat Risks- These are the major options available for risks: Avoid the risk Modify the likelihood and/or impact of the risk Transfer the risk Retain the risk Exploit the risk EXAMPLE- Company Y considered purchasing a new type of battery for their phones, but the board rejected the idea due to the increased risk of product liability claims. Monitor and Review Rather than a step-by-step procedure, the risk management process is really a set of interconnected activities that occur at the same time Factors in Determining Risk Criteria - Answer: Causes of Risk Effects of Risk Metrics used to measure the effects of risk Timeframe of potential effects Methods to determine level of risk Approach to combinations of risk Risk management framework - Answer: A foundation for applying the risk management process throughout the organization. Risk criteria - Answer: Information used as a basis for measuring the significance of a risk. Risk criteria should reflect the organization's values (risk management policy), objectives and resources and be consistent with policies and statements about risk management. Defining Enterprise-Wide Risks - Answer: Strategic risk- Uncertainties associated with the organization's long-term goals and management decisions. EXAMPLE- A new computer chip that could position a company for explosive growth is an example of Operational risk- Uncertainties associated with the organization's procedures, systems, and policies Financial risk- Uncertainties associated with the organization's financial activities physical risks can generally be broken into two categories: - Answer: Natural- Natural risks are largely beyond human control. Consequently, risk management has little, if any, effect on reducing the likelihood of a related events. However, organizations can implement loss-reduction measures to control the consequences of any such events. EXAMPLES are Cave in, Tornado, Mildew. Human- Human risk sources include deliberate acts of individuals or groups, as well as events that are not deliberate but involve some element of human intervention. Examples include terrorism, vandalism, pollution, and explosion. Risk-control techniques can usually manage the likelihood and consequences of HUMAN RISK sources to some extent. Damaged or destroyed property can result in any of these outcomes - Answer: Reduction in property value—The difference between the value of the property before the loss (pre-loss value) and after the loss (post-loss value) Increased expenses—Expenses in addition to normal living expenses that are necessary because of the loss, such as the cost of renting a hotel room following a house fire Lost income—Loss of income that results when property is damaged or destroyed, such as the loss of rent that can be collected on a property that is damaged by a hurricane 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 has a financial interest. The most common personal liability loss exposures for property owners are related to slip-and-fall injuries of visitors or guests on the premises - Answer: Premises Liability What types of financial consequences can individuals or families face as a result of a liability claim against them? - Answer: Costs of a legal investigation and defense Money damages awarded if the defense isn't successful or if the claim is settled out of court Special Damages - Answer: A form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person's loss, such as medical expenses or lost wages. General Damages - Answer: A monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific measurable expenses. Punitive Damages - Answer: Monetary damages that may be awarded to a plaintiff to punish the defendant and deter similar conduct in the future. Premises and operations liability - Answer: The premises and operations liability loss exposure relates to liability arising from bodily injury or property damage caused either by an accident on an organization's owned, leased, or rented premises or by an accident that arises from the organization's ongoing (as opposed to completed) operations but occurs away from the premises. An organization's liability for such accidents is usually based on negligence: the organization's failure to exercise the appropriate degree of care owed to a person under the circumstances. Sometimes this can be based on strict liability Strict Liability - Answer: The legal responsibility for damage or injury even if you are not negligent For example, a blasting contractor could be held strictly liable for unintentional damage to buildings near the blasting operations. It can also apply to liability assumed by a land owner or occupier under hold-harmless agreements in contracts such as leases of premises, maintenance agreements, and construction contracts. Products and Completed Operations - Answer: A form of General Liability insurance that covers a company against liability arising out of its products (a manufacturer) or its completed operations (a contractor or architect). EXAMPLE- Lawn Chemical Company applies fertilizer and weed killer to lawns and shrubs. Which one of the following is a liability loss exposure to which Lawn Chemical Company likely has a significant exposure? Automobile Liability - Answer: legal responsibility for bodily injury or property damage arising out of the ownership, maintenance, or use of automobiles Workers Compensation and Employers Liability - Answer: Federal Employer's Liability Act (FELA) Covered under Section II - Liability Actions must begin within 3 years from the cause of action An employer's responsibility to pay claims under the various state and federal workers compensation statutes is a common example of liability imposed by statute. The typical workers compensation statute is intended to provide an "exclusive remedy" for occupational injury or illness to all employees subject to the law. This means that workers compensation insurance benefits are intended to be the only remedy available to pay for employee injuries that are sustained in the scope of employment, regardless of which party is at fault. Liability loss exposure - 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. Typically results from the breach of a legal duty involving ownership or use of property, as well as from contractual agreements Civil law - Answer: A classification of law that applies to legal matters not governed by criminal law and that protects rights and provides remedies for breaches of duties owed to others. Tort law - Answer: The branch of civil law that deals with civil wrongs other than breaches of contract. Molly was involved in an auto accident. She suffered some injuries and her car was totaled. She is seeking compensation under the tort liability system. Under the tort liability system, injured accident victims must prove that Another party was at fault before they can collect damages most popular for auto liability claims/accidents Negligence - Answer: The failure to exercise the degree of care that a reasonable person in a similar situation would exercise to avoid harming others. Danforth Grocery Store specializes in fresh produce and is open 24 hours year round. The store has contracts with suppliers to deliver produce and foods by 5:00 AM daily, so the parking area at the rear of the store is congested from 4:30 AM to 5:30 AM. Customer traffic is heaviest from 7:00 AM to 9:00 AM and again from 3:00 PM to 6:00 PM. The store has had six slip-and-fall claims from customers in the past year. Danforth Grocery Store is most likely to be legally liable for a loss because of ALSO Premises liability Intentional tort - Answer: A tort committed by a person who foresees (or should be able to foresee) that his or her act will harm another person. Strict liability (absolute liability) - Answer: Liability imposed by a court or by a statute in the absence of fault when harm results from activities or conditions that are extremely dangerous, unnatural, ultrahazardous, extraordinary, abnormal, or inappropriate. What is the difference between work-related injuries and illnesses? - Answer: An on-the-job injury is usually caused by an external physical force, resulting in a laceration, fracture, contusion, or amputation. By contrast, a work-related illness usually develops more slowly, as a result of an organic or inorganic agent being absorbed, ingested, inhaled, or injected by an employee. Directors and Officers Liability Risks - Answer: While these roles can vary from organization to organization, boards of directors generally establish corporate policy and appoint executive officers—such as the chief executive officer (CEO), president, secretary, treasurer, and so forth—to run the day-to-day operations. Although noncorporate entities also have boards of directors with the same responsibilities, the titles of their officers may differ. In addition to performing specific functions, directors and officers occupy a position of trust for stockholders and the general public. Fiduciary duty is a common source of risk for directors and officers. FIDUCIARY DUTIES include: Duty of Care Duty of Loyalty Duty of Disclosure Duty of obedience The duties of a plan fiduciary are comparable to those of a corporate director: Loyalty Prudence Diversification Adherence Employment Practices Liability Risks - Answer: Employers face employment practices liability (EPL) risks under a variety of national and local laws. These are the major types of EPL risks organizations can face: Discrimination Wrongful Termination- EXAMPLE- A 35-year-old female was employed at a company for five years. During her term of employment the company began having financial difficulty and determined that they needed to lay off 5 of its 125 employees in order to stay in business. The company laid off the female employee and 4 other female coworkers. All of the women had a history of receiving positive employee evaluations. The laid off workers filed a claim against the company alleging discrimination. Which one of the following best describes the basis of the employment practices claim filed against the company? Sexual Harassment Retaliation- EXAMPLE- What is the name given to a claim by an employee who says that he or she was fired because of the filing of a workers compensation claim? Human Resource Risk - Answer: Although human resource risks originate from many sources, three are prevalent. Work-Related Injury and Illness Retirement and Resignation Work-Related Violence Fiduciary duty - Answer: The duty to act in the best interests of another. act for someone else's benefit What is the term given to the duty to act for someone else's benefit Operational Risks - Answer: Operational risk is integrated in every activity of an organization. EXAMPLE- The use of risk quadrants to identify and categorize risk can provide a framework for risk identification. One quadrant includes such risks as loss of production due to a key supplier not delivering raw materials or a mechanical breakdown of equipment. This risk quadrant is EXAMPLE- Jean is the Risk Manager for a Fortune 1000 company. Her CFO has tasked her to analyze vulnerabilities in the firm's supply chain. The adequacy of suppliers to meet an organization's needs would be an example of which one of the following types of risk? Organizations can benefit when they categorize their specific operational risks and develop a framework for managing them. In a risk classification framework, operational risks are typically divided into four categories: people, process- Process risk typically includes the procedures and practices organizations use to conduct their business activities. system- Systems risk concerns the function of technology, its intentional or accidental failure, and security. EXAMPLE- Sixth National Bank stores all of its financial records in an electronic data base. Sixth National customers are able to access their accounts on-line with a user identification number and a password. Last weekend, a computer hacker was able to breach the firewall of the electronic database and gain access to customer account data. This operational risk for Sixth National Bank is external events- things that you don't (usually) see in the internal data. They are nevertheless things which can affect your customer. Things like changes in law, changes in economics, or even changes in the weather Financial Risks - Answer: Financial risk can present itself in many ways, but the main forms are market risks, credit risks, and price risks. EXAMPLE- George works for a large company and part of his job is to monitor assets according to their liquidity. George is particularly concerned that the company fleet cars are affecting its liquidity and rising fuel prices are having an adverse effect during tight economic markets. If George's concerns were categorized as causes of loss according to the quadrants of risk, his concern most directly relates to which one of the following types of risks 1) Market Risks- is the risk that the value of an investment or investment portfolio will decrease or increase because of changes in the market for that investment. Associated market risks include: Interest rate- The risk that a security's future value will decline because of changes in interest rates. EXAMPLE Like most insurance companies, the majority of Insurance Company's portfolio is invested in bonds. If interest rates increase, the value of the bonds in the portfolio will decrease. This risk to Insurance Company is called Exchange rate- Uncertainty about an investment's value because of potential changes in the exchange rate between currencies. Liquidity risk- The risk that an asset cannot be sold on short notice without incurring a loss. 2) Credit risk- relates to the uncertainty about a party that is obligated to pay money per a binding agreement. ill the party actually pay all the money owed and on time? For instance, the party could be a customer who bought the organization's products or services on credit. If every customer paid the amount owed on time, there would be no credit risk. However, if a customer defaults on the credit agreement, the income from the sale is at risk. EXAMPLE- One financial risk for an insurer is that the insured wil Professionals dealing with homeowners policies need to know the difference between named perils coverage and open perils coverage. Can you explain the difference? - Answer: Insurance policies that offer named perils (or broad form) coverage list the causes of loss for which coverage is provided. Policies that offer open perils (or special form) coverage insure against all causes of loss except those specifically excluded or limited by the policy. So open perils coverage is typically more comprehensive. HO-2 (broad form) - Answer: covers the dwelling, other structures, and personal property on a named perils basis HO-3 (special form) - Answer: The HO-3 provides the broadest coverage available on structures: open perils coverage. Named/open HO-4 (contents broad form) - Answer: covers a tenant's personal property on a named perils basis Chris and Cassidy rent a 3-bedroom house in Baltimore. They want to purchase a homeowners policy to cover their furniture and other personal property, and also to protect them from any liability that may arise from injuries to invited guests and visitors. Which one of the following homeowners forms would be most appropriate for Chris and Cassidy HO-5 Comprehensive Form - Answer: provides open perils coverage ("all-risks coverage") on the dwelling, other structures and personal property. HO-6 (unit owners form) - Answer: covers personal property on a named perils basis. A minimum of $5,000 of insurance is also provided on the condominium unit that covers improvements and additions HO-8 (modified coverage form) - Answer: designed for older homes. Dwelling and other structures are based on the amount required to repair or replace using common construction materials and methods. Named HO-14 - Answer: Contents Comprehensive Form ( Renters). Open PAP Sections (Auto) - Answer: ● Declarations Page ● Six Sections: 1. Part A Liability 2. Part B Medical Payments 3. Part C Uninsured Motorist 4. Part D Coverage for Damage to Your Auto 5. Part E Duties After an Accident or Loss 6. Part F General Provisions ● Endorsements While most states are at-fault states, some are no-fault states. No-fault laws authorize or mandate the use of personal injury protection (PIP) coverage and define the benefits that insurers can or must provide in those states. They tend to remove small bodily injury claims from the court system. No-fault states have enacted no-fault laws to differing degrees, resulting in three types of no-fault plans: Modified No fault plans-These place some restrictions on the right to sue an at-fault driver but do not entirely eliminate this right. Under a modified no-fault plan, injured motorists collect economic losses from their own insurers through the PIP benefits mandated by the plan. They can then sue at-fault drivers for any economic losses that exceed the no-fault coverage limits and for noneconomic losses if their injuries exceed a threshold stated in the law. Add on plans-These add no-fault benefits to auto insurance policies but place no restrictions on the injured person's right to sue a negligent party for damages. choice no fault plans-Under these plans, insureds can choose whether to be covered on a modified no-fault basis. In most states with choice no-fault plans, insureds who choose not to be covered on a modified no-fault basis must purchase add-on no-fault coverages. Loss exposure - Answer: Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs. Is insurance better suited for financing high-severity, low-frequency losses or low-severity, high- frequency losses? - Answer: Insurance is often the best technique for financing losses with high severity and low frequency. Because insurance shields organizations from the financial consequences of losses they'd have difficulty paying for on their own, it's a key component of most comprehensive risk management programs. In general, insurers are willing to insure a loss exposure that has all or most of these characteristics: - Answer: It's associated with pure risk It's accidental from the insured's standpoint It's definite and measurable For a loss to be covered, the policyholder must be able to demonstrate a definite proof of loss, normally in the form of bills in a measurable amount. It's one of a large number of similar exposure units EXAMPLE- Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to drive it to special events at schools around the country where it will serve as a mobile billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to insure his vehicle because it fails to meet one of the ideal characteristics of an insurable risk. Which characteristic is Oscar's vehicle least likely to meet? It's not catastrophic for the insurer It's economically feasible to insure Insurance is effective in paying for losses, maintaining liquidity, managing uncertainty, and complying with legal and regulatory requirements. It can be less effective than retaining the risk in minimizing the cost of risk, which helps to explain why retention, along with insurance, is a key component of most risk financing plans. An additional benefit of insurance is that an organization can generally deduct insurance premiums for income tax purposes. Building and Personal Property Coverage Form (BPP) - Answer: A commercial property coverage form that can be used to cover buildings, "your business personal property," and personal property of others. The BPP's definition of "building" includes these elements: • Completed additions to covered buildings • Fixtures (including outdoor fi xtures) • Permanently installed machinery and equipment • Personal property owned by the insured and used to maintain or service the building or its premises b. The building defi nition also covers additions, alterations, or repairs in progress (including materials, equipment, and supplies used in connection with such work) that are not otherwise insured The ISO Building and Personal Property Coverage Form (BPP) can cover any combination of three broad categories of property: Building, Your Business Personal Property, and Personal Property of Others. The BPP's main insuring agreement states that the insurer will pay for direct physical damage to covered property at the described premises resulting from a covered cause of loss. So before any claim for property loss can be paid, the damaged property must qualify as covered property. BPP covered property - Answer: Let's take a look at the BPP's three categories of covered property. -Building The BPP's definition of "building" includes these elements: Completed additions to covered buildings Fixtures (including outdoor fixtures) Permanently installed machinery and equipment Personal property owned by the insured and used to maintain or service the building or its premises (for example, fire-extinguishing equipment; outdoor furniture; floor coverings; and equipment for refrigeration, ventilation, cooking, dishwashing, or laundering) The building definition also covers additions, alterations, or repairs in progress (including materials, equipment, and supplies used in connection with such work) that are not otherwise insured. However, these materials, equipment, and supplies must be located within 100 feet of the described premises to be covered. -Your Business Personal Property Your Business Personal Property covers personal property owned by insureds for use in their business. One of these conditions must be met for this coverage to apply: The property must be located in or on the described building. The property must be located in the open (or in a vehicle) within 100 feet of either the building or structure or of the described premises, whichever distance is greater. -Personal Property of Others Some businesses, such as laundries, dry cleaners, or computer repair shops, take temporary possession of customers' property to perform the services they offer. The Personal Property of Others coverage protects the insured against loss of or damage to such property under these conditions: While the property is in the insured's care, custody, or control While the property is in or on the building described in the declarations or within 100 feet of either the building or structure or of the described premises, whichever distance is gre Business Income and Extra Expense Coverage - Answer: Sum of (1) net profit or loss that would have been earned or incurred if the suspension had not occurred and (2) normal operating expenses, including payroll, that continue during the suspension. Insurance for most business income exposures is available under these two ISO coverage forms: -The Business Income (and Extra Expense) Coverage Form—This covers both business income and extra expense losses (even if the extra expenses do not reduce the business income loss). -The Business Income (Without Extra Expense) Coverage Form—This covers business income loss but covers extra expenses only to the extent that they reduce the business income loss. Either form can be included in a commercial property coverage part, with or without another commercial property coverage form, such as the Building and Personal Property Coverage Form. Commercial Crime Coverage - Answer: Briefly described, commercial crime insurance covers money, securities, and other property against a variety of criminal acts, such as employee theft, robbery, forgery, extortion, and computer fraud. Financial institution bonds are used to meet the crime insurance needs of financial entities, such as banks and insurance companies. Three basic coverage combinations are available for crime loss exposures: commercial crime, which provides crime coverage to organizations other than financial institutions and government entities; government crime, which provides crime coverage for government entities; and employee theft and forgery, which provides only employee theft and forgery or alteration coverage. The commercial crime and government crime coverages are available either in a coverage form that can be added to a package policy or as a stand-alone monoline policy. Commercial General Liability - Answer: Commercial general liability insurance encompasses three main coverages: bodily injury and property damage liability, personal and advertising injury liability, and medical payments. Personal and Advertising Injury Liability example- Neil is a security officer for the Malvern Mall. One day, he physically stopped a customer from leaving one of the stores. Neil detained the customer while he searched their bags for some stolen merchandise. The customer filed a false arrest suit against Malvern Mall. Which one of the following coverages under the shop's commercial general liability policy would provide coverage for defense and damages under this suit? Commercial Auto Liability - Answer: Commercial auto insurance can be used to cover liability loss exposures, property loss exposures, and personal loss exposures arising out of the ownership, maintenance, or use of autos. A common format for insuring these loss exposures is the Insurance Services Office, Inc. (ISO) commercial auto coverage part. A commercial auto coverage part can be included in a commercial package policy (CPP) or issued as a monoline policy. Workers Compensation Liability - Answer: Workers compensation liability insurance covers an employer's obligation to pay benefits required by workers compensation statutes. Generally, payments are limited only by what is required by the applicable workers compensation law—the policies themselves do not show a dollar limit. The insurer has a duty to defend the insured against claims, proceedings, or suits seeking benefits payable by the policy. The insurer also agrees to pay additional costs, such as for investigating a claim and handling litigation costs. Although intended to be an exclusive remedy for occupational injuries, there are a number of exceptions that allow a covered employee to make a tort claim against an employer for a work-related injury Employers Liability Insurance - Answer: Employers liability insurance covers an employer against liability for an employee's occupational injury or disease that is not covered by a workers compensation statute. 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. Commercial package policy (CPP) - Answer: Policy that covers two or more lines of business by combining ISO's commercial lines coverage parts. Monoline policy - Answer: Policy that covers only one line of business. Third-party-over action - Answer: A separate legal action, brought by a defendant in a lawsuit, against a third party that might be liable to the defendant for all or part of the plaintiff's claim in the original lawsuit. Loss of consortium - Answer: The loss of benefits that one spouse is entitled to receive from the other, including companionship, affection, and sexual relations resulting from the injury or death of a spouse. The loss of benefits that one spouse is entitled to receive from the other, such as companionship, affection, or housekeeping and yard work, is referred to as which one of the following terms in regard to employers liability coverage, although restricted by many states? Dual-capacity doctrine Dual Capacity - Answer: A legal doctrine giving the employee the right to sue the employer when the employer acts in a capacity other than that of employer. The dual capacity doctrine has not been accepted by all states Estoppel - Answer: A legal principle that prohibits a party from asserting a claim or right that is inconsistent with that party's past statement or conduct on which another party has detrimentally relied. For estoppel to occur, the insured must suffer harm from relying on the insurer's conduct. These are some examples of circumstances that can result in estoppel: Incurring additional expenses Receiving instruction contrary to policy conditions Disposing of damaged property Insurable interest - Answer: An interest in the subject of an insurance policy that is not unduly remote and that would cause the interested party to suffer financial loss if an insured event occurred. Ratemaking - Answer: The process insurers use to calculate insurance rates, which are a premium component. Coinsurance - Answer: An insurance-to-value provision in many property insurance policies providing that if the property is underinsured, the amount that an insurer will pay for a covered loss is reduced. Replacement cost - Answer: The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation. Actual cash value (ACV) - Answer: The cost to replace property with new property of like kind and quality less depreciation. Blanket insurance - Answer: Provides coverage for one type of property in more than one separately rated building or two or more types of property in one or more separately rated buildings under a single limit. Agreed value method - Answer: A method of valuing property in which the insurer and the insured agree, at the time the policy is written, on the maximum amount that will be paid in the event of a total loss. Deductible - Answer: A portion of a covered loss that is not paid by the insurer. Waiver - Answer: The intentional relinquishment of a known right. Subrogation - Answer: The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss. Exculpatory clause (exculpatory agreement) An exculpatory clause is - Answer: A contractual provision purporting to excuse a party from liability resulting from negligence or an otherwise wrongful act. part of a contract that prevents one party from holding the other party liable for damages related to the contract. Exculpatory clauses are used quite often in purchases such as the ones included with an amusement park or plane ticket For example, a commercial lease may have an exculpatory clause that the landlord is not liable for injuries resulting from utility interruptions, as well as an indemnification clause that shifts liability to the tenant regarding any injuries the tenant's invitees may suffer due to that utility outage. Express warranty - Answer: An explicit statement about a product by the seller that the buyer or other user may rely on and that provides a remedy in the event the product does not perform as claimed. Implied warranty - Answer: A warranty that is understood to apply even though it does not appear in the policy. Implied warranty of fitness for a particular purpose - Answer: An implied warranty that a product is fit for a particular purpose; applies if the seller knows about the buyer's purpose for the product. Implied warranty of merchantability - Answer: An implied warranty that a product is fit for the ordinary purpose for which it is used. Hold-harmless agreement (or indemnity agreement) - Answer: A contractual provision that obligates one of the parties to assume the legal liability of another party. The broad form of the hold-harmless agreement attempts to place all financial consequences of potential losses on the transferee. Punitive damages (exemplary damages) - Answer: A payment awarded by a court to punish a defendant for a reckless, malicious, or deceitful act to deter similar conduct; the award need not bear any relation to a party's actual damages. Artificial intelligence (AI) - Answer: Computer processing or output that simulates human reasoning or knowledge. stages of the critical thinking process - Answer: Identify the Question or Challenge as Specifically as Possible Gather Information Develop Initial Hypothesis Challenge Initial Hypothesis Reformulate Hypotheses Develop Conclusion What makes an insurer's predictive model fair and transparent? - Answer: A fair model enables an insurer to make risk and pricing decisions based on data that's both accurate and truly predictive of the expected future cost of coverage. A transparent model allows an insurer to demonstrate the rationale for risk-related decisions and illustrates how it collects and uses consumer data. It counters the perception that insurers make decisions based on results from so-called "black boxes" that generate mysterious calculations from consumer data. Critical thinking - Answer: The process of actively analyzing information gathered through research, experience, and observation to solve a problem or determine a future course of action. the core principles of critical thinking include Logical analysis Data driven analysis Customer segment - Answer: A collection of customers grouped by shared characteristics, such as demographics, behaviors, or region. Target marketing - Answer: Focusing marketing efforts on a specific group of consumers. ABC Insurance [ABC] wants to sell more auto policies to new drivers. Their data shows newer drivers stay with an insurer for at least 5 years before they move away, and the premium rates for this group are higher so potentially could bring in more premium. They have decided to spend more advertising money on social media ads and promotions and move away from brochures and billboards. Recent surveys of new drivers showed they want more choices and control over their costs. So, ABC will highlight different policy limits, deductibles and coverage options and offer discounts for safe and defensive driving course completion, student performance, anti-theft reductions and new car credits to increase the number of auto policies sold to new drivers. ABC is practicing which one of the following Product targeting - Answer: Designing a specific product for a market, a specific approach to a market, or both. Designing a specific product for a market, or undertaking a specific approach to a market, or both describes which one of the following? The Communication Process - Answer: Set a clear communication objective Analyze your audience Decide when and where to talk Pay attention to your body language Ask for feedback Active listening consists of three elements - Answer: attention, response, and suspension of judgment Considerations when determining which method of communication to use include: - Answer: Is receiving immediate feedback important? Is having a written record of the communication necessary? Is the information being delivered confidential? Components of Strategy Formulation - Answer: Analysis of internal and external environment Development of long term strategies and organizational goals Determination of strategy at different organizational levels Strategy Evaluation - Answer: Strategy evaluation, also called strategic control, involves measuring a strategy's success. Management uses control mechanisms to gauge progress on integrating established strategies into an insurer's activities and achieving set goals. The process has four steps: Establish standards. Create and apply measurements. Compare actual results to standards. Evaluate and implement corrective actions if goals are not met. Several categories of organizational controls may be used to monitor goals: Financial Operational or process Human or behavior controls Strategic management process - Answer: The process an organization uses to formulate and implement its business strategies. Mission statement - Answer: A broad expression of an entity's goals. Vision statement - Answer: The aspirational description of what an organization will accomplish in the long-term future. SWOT analysis - Answer: A method of evaluating the internal and external environments by assessing an organization's internal strengths and weaknesses and its external opportunities and threats. Functional structure - Answer: An organizational structure in which departments are defined by the operation they perform. EXAMPLE- In a single-line insurer, which one of the following organizational structures might be the most suitable? Multidivisional structure - Answer: An organizational structure in which divisions are organized into separate profit centers. EXAMPLE- The Spence Company has an organizational structure in which groups are organized into separate profit centers. Which one of the following types of organizational structure is this? EXAMPLE- ABC Insurance Company is organized by geographic regions and has departmental operations within each region. This best describes which one of the following types of organizational structure? Cost leadership - Answer: A business-level strategy through which a company seeks cost efficiencies in all operational areas. company develops online quoting, issuance, and online claims help The Five Forces Model - Answer: A method of evaluating the external environment in which a company operates. Involves assessing five forces that drive competition: threat of new entrants threat of substitute products or services bargaining power of buyers bargaining power of suppliers rivalry among existing firms. The widely used Five Forces Model, developed by Harvard Business School professor Michael E. Porter, analyzes the external task, or competitive, environment. This environment includes customers, competitors, and suppliers; for insurers, it also includes reinsurance providers and regulators. Identifying internal strengths and weaknesses involves considering financial, physical, human, and insurer assets. SWOT analyses help managers determine the current state of their companies by considering assets such as: - Answer: Managerial expertise Available product lines Staff skill levels and competencies Current strategies Customer loyalty Growth levels Organizational structure Distribution channels Trend analysis - Answer: An analysis that identifies patterns in past data and then projects these patterns into the future. There are four levels at which an insurer may carry out its strategic plan - Answer: corporate- At the corporate level, an insurer's executive team allocates organizational resources properly and coordinates strategies throughout the company to maximize profits. Corporate-level strategies are relatively long term, established for five-year periods or more. business-Business level strategies are developed by managers who support the corporate-level strategy. Business-level management responds to changes in the external environment, budgets for needed resources, and coordinates the functional-level strategy within the division. Set for three-to-five-year windows, business-level strategies, sometimes referred to as tactical strategies, come in the form of cost leadership, differentiation, and focus. functional-Functional level strategies are the plans for managing a particular functional area, such as finance, marketing, and claims. In insurance operations, functional-level strategies specify how the underwriting, claims, actuarial, and other departments advance business-level strategies. operational-Operational level strategies involve daily business processes and workflows and are implemented within individual departments to support the strategies of the functional, business, and corporate levels. Vertical integration strategy - Answer: A corporate-level strategy through which a company either produces its own inputs or disposes of its own outputs. EXAMPLE- Smith's Bakery is a mid-sized regional company that specializes in producing bread from a variety of organic grains. It sells its products through grocery stores as well as through its own chain of retail outlets. As a result of experiencing problems with the quality and quantity of organic grains available, the corporate management team decides to purchase a number of farms locally, convert them to organic operations, and manage them directly. Smith's is able to eliminate suppliers in the process and deliver quality products for sale. Which one of the following methods has Smith's employed in producing its own grains This VS. related diversi- While vertical integration involves in which a company either produces its own inputs or disposes of its own outputs. Related diversification is which a company expands its operations into areas that are similar to its existing operations Differentiation strategy - Answer: A business-level strategy through which a company develops products or services that are distinct and for which customers will pay a higher price than that of the competition. Focused cost leadership strategy - Answer: A business-level strategy through which a company focuses on one group of customers and offers a low-price product or service. Focused differentiation strategy - Answer: A business-level strategy through which a company focuses on one group of customers and offers unique or customized products that permit it to charge a higher price than that of the competition. EXAMPLE- Goshen Insurance has decided to develop a package policy to meet the needs of the rapidly growing home health care industry. In addition to property and general liability, the package will also include professional liability coverage and auto liability coverage for care givers when they are transporting patients. Which one of the following types of business-level strategies has Goshen Insurance decided to follow? Retention ratio - Answer: The percentage of insurance policies renewed. Which one of the following best illustrates the benefit of insurance in driving economic growth? - Answer: Making loans of funds collected in premiums before losses are paid Insurers' response to the liability crisis of a rapid increase in tort litigation and class-action lawsuits evolved in which one of the following ways? - Answer: Changing liability coverage to a claims-made basis Collaboration Cooperation coordination - Answer: when individuals, departments, or teams from different areas work together to accomplish a shared organizational goal? working together to achieve industrial objectives improving efficiency and reducing redundancy The fundamental purpose of a risk management framework is to - Answer: Integrate risk management throughout the organization Which one of the following is a major benefit that blockchain technology provides to holistic risk management? - Answer: Because of their security, blockchains can eliminate the need to verify the accuracy of risk management data Directors and officers of a corporation owe special duties to the stockholders of that corporation. Those duties include: the duty of care; the duty of loyalty; the duty of disclosure; and the duty of obedience. What is the term used to describe these duties? - Answer: Fiduciary One category of operational risk includes procedures and practices organizations use to conduct their business activities. This category is - Answer: Liquidity risk Corporate directors are considered to have met their duty of care if they Which one of the following is a major responsibility of corporate directors - Answer: Act in good faith and in a manner they reasonably believe to be in the best interests of the corporation To perpetuate a competent board through regular elections The three keys to leading effective meetings are - Answer: preparation, participant management, and Follow up Carmella is a property claims adjuster who is handling a fire loss for an insured home. The insured is a first-time homeowner and just purchased the home a year before the loss. The homeowners had a mix of new and used items in the home that were damaged by either fire, soot or smoke. Carmella has reviewed the policy and received pictures from the loss from an outside adjuster. She is ready to send the initial contact to the homeowner with an analysis of coverage on the loss. Which one of the following ways would be the preferred way to communicate? - Answer: A formal letter Which one of the following is the benefit of eliminating unnecessary attendees to a meeting? - Answer: It enables a more efficient meeting by limiting the discussion to only key stakeholders William is a project manager for Parker International. He has been assigned a key project with a short deadline. William realizes that this project is going to require revising the job duties of some individuals and a collaborative effort from of all team members. When revising job duties, William should do which one of the following? - Answer: Try to enrich individuals' work rather than merely expand it Gaining a holistic perspective requires - Answer: Developing a thorough understanding of each unit's role and how it supports or depends on other units and stakeholders The use of risk quadrants to identify and categorize risk provides a framework for After an organization's internal and external environments and its business strategies have been examined, the next step to take is - Answer: To determine whether a change in course is required to achieve its goals Financial controls include - Answer: assessing the company's stock price or using return on investment Loss ratios, expense ratios, and combined ratios are all examples of Financial controls These include stock price, return on investment formulas, cost-benefit analyses, loss ratios, expense ratios, and combined ratios. One type of noninsurance risk control transfer, a disclaimer of warranties, is used to - Answer: Deny any express warranties made in conjunction with the sale of property When negotiating noninsurance risk transfer terms, risk management professionals should consider the - Answer: Legal enforceability of contract provisions Which one of the following is the most commonly used method of compensating auto accident victims? - Answer: Tort liability system Molly was involved in an auto accident. She suffered some injuries and her car was totaled. She is seeking compensation under the tort liability system. Under the tort liability system, injured accident victims must prove that Another party was at fault before they can collect damages Actuaries/Data Scientists/Analytics Professionals - Answer: Technical and analysis skills Mathematics Statistics Economics Finance Sales and Marketing Professionals - Answer: Communication Relationship- Building Underwriters - Answer: Detail- oriented Investigative Creative Problem Solvers Claims Professionals - Answer: Empathetic Communicative Resourceful Interest rate risk - Answer: Like most insurance companies, the majority of Insurance Company's portfolio is invested in bonds. If interest rates increase, the value of the bonds in the portfolio will decrease. This risk to Insurance Company is called Equipment Breakdown Coverage - Answer: Equipment Breakdown Coverage, formerly known as Boiler & Machinery Coverage, is insurance for loss due to the equipment breakdown of most types of equipment, such as boilers, machinery, refrigeration systems, air conditioning systems, electrical equipment, etc. The resulting Business Income and Extra Expense loss is often covered, as well. Equipment Breakdown is excluded in most standard property insurance policies. Coverage may be added by endorsement to a policy or written as a monoline policy. The primary form of coverage is the Equipment Breakdown Protection Coverage Form and, while individual policies and endorsements provide the same basic coverage, their forms vary among insurers. Many insurers include equipment breakdown coverage in their commercial package policies. To facilitate reinsuring the coverage with an insurer specializing in that line of insurance that can also provide claims services. Inland Marine Insurance - Answer: Inland Marine insurance provides flexible solutions that cover many loss exposures other commercial forms don't- primarily those that involve some element transportation. Wesley Graham of New Wave Insurance Solutions offers personalized and specialized insurance options to various types of companies. His firm provides inland marine insurance to many commercial customers to help insure their companies have options and the most innovative ways to cover various situations and risks. Which of the following would be true of New Wave's coverages that it offers? Jewelers and fine arts dealers can be adequately covered using a dealers policy "The contractor agrees to indemnify and hold harmless the owner against claims, damages, bodily injury, or property damage arising out of the contractor's work and caused by any act of omission of the contractor, his agents, and his employees." This is an example of which one of the following forms of a hold-harmless agreement? General Contractor agrees to indemnify Building Owner only for claims that result from General Contractor's own negligence, often referred to as sole fault. - Answer: Limited form Party A and Party B have entered into a contract specifying that Party A will hold Party B harmless from claims arising from their joint fault. This is an example of which one of the following forms of a hold-harmless agreement? hold- harmless agreement - Answer: Intermediate form- General Contractor agrees to indemnify Building Owner only for claims that result from General Contractor's sole fault or from both parties' joint fault. Eric is scheduling a meeting with his team. His team is comprised of some people in the office and some working remotely. Eric would like to discuss a handful of results shown on a graph, discuss some bullet points, and show a 10-minute video. Which one of the following should Eric consider to prepare for the meeting? - Answer: Make sure to mute those joining remotely to start the meeting The strategy formulation phase of the strategic management process involves - Answer: Analyzing the external and internal environments Which one of the following statements is true regarding contracting for services as a noninsurance risk control transfer - Answer: Liability loss exposures associated with an activity are not transferred easily, especially regarding harm to third parties To be successful, the differentiation business-level strategy must - Answer: Accurately determine customers' preferences to develop products perceived as distinctive Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures? - Answer: A common function that insurance provides is a spreading of risk across a large number of similar exposure units within the same period. Ideally insurable exposures must be definite in time, cause, and location TIME, CAUSE, and LOCATION In order to achieve collaboration, group leaders must - Answer: Remain focused on preventing stakeholders from straying from the common goal A state wants to build a road through an environmentally-sensitive area. The area includes endangered flora and fauna, as well as wetlands. Build-Rite Construction expressed interest in the project, but is concerned about potential liability. Build-Rite agrees to build the road if the state assumes all responsibility for any liability arising out of the construction of the road. A state representative has signed-off on the contract, agreeing that the state will be responsible for all liability. This transfer of responsibility for fault illustrates which one of the following forms of noninsurance risk financing transfer General Contractor agrees to indemnify Building Owner for losses that result from General Contractor's sole fault, both parties' joint fault, or Building Owner's sole fault. - Answer: Broad form Operational or process controls - Answer: These include processes to monitor work flow, production processes, and customer service. In a claims department, such controls could include the average cost of settlement, average case load per adjuster, or file turnover rates for individual adjusters. Human or Behavior Controls - Answer: These include rules, policies, and procedures that provide operating guidelines for employees within an insurer, including measurement of individual performance. Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the policy period. This provision supports the principle that insurable loss exposures must ideally be - Answer: Definite All of the following situations confirm why medical payments coverage providing a modest limit to settle minor bodily injury cases is beneficial - Answer: It satisfies potential liability claimants It allows for prompt settlements It avoids possibly larger claim amounts IT DOES NOT It xxxx determines the legally responsible party xxxx A new application for commercial coverage is being reviewed by underwriter Becka. Also available to her are the potential insured's financial disclosures. Which one of the following is correct regarding factors Becka should consider in evaluating the potential customer's request for coverage? - Answer: Qualitative factors of the applicant's leadership can be important One example of a noninsurance risk financing transfer is a The broad form of the hold-harmless agreement attempts to place all financial consequences of potential losses on the transferee. - Answer: Hold-harmless agreement In both noninsurance risk control and noninsurance risk financing transfers, - Answer: A contract is usually formed before any loss occurs One enterprise risk management (ERM) approach to categorizing risks involves dividing risks into four risk quadrants. The risks categorized as hazards risks are - Answer: Traditionally managed by risk management professionals An employee benefit plan fiduciary has a duty of loyalty, meaning that - Answer: The fiduciary's actions must be solely in the best interests of the plan