CPCU 500 Exam Study Guide | Complete Solutions (Verified Answers)

CPCU 500 Exam Study Guide | Complete Solutions (Verified Answers) In the context of risk, the chance of being injured while driving to and from work, loading a truck at work, moving furniture at home, or falling in an icy parking lot at the mall are all examples of A. Possibilities. B. Uncertainties. C. Probabilities. D. Losses. The statement, "There is a five percent chance that John will be injured in an automobile accident while driving to work tomorrow," is an example of A. Quantifying risk. B. Verifying risk. C. Quantifying loss exposures. D. Identifying hazards. Which one of the following is measurable and quantifies risk? A. Probability B. Possibility C. Uncertainty D. Feasibility One of the elements of risk is uncertainty. Which one of the following best describes the uncertainty that risk involves? A. Uncertainty as to how to manage potential losses B. Uncertainty as to whether a negative outcome is possible C. Uncertainty as to the type and timing of an outcome D. Uncertainty as to whether insurance is available 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 A. Strategic risk. B. Hazard risk. C. Operational risk. D. Financial risk. Company G is a manufacturer of high profile golf equipment. The risk management professional for Company G is concerned about loss of business related to product design. Failing to respond to changing customer demand and preferences in the design of golf clubs could cost Company G significant market share. Categorized according to the quadrants of risk, this exposure to loss would be classified as a(n) A. Strategic risk. B. Financial risk. C. Operational risk. D. Hazard risk. George has received an inheritance and is deciding what to do with the money. He has limited his options to four choices: donate all the money to his favorite charity, use the entire inheritance to buy a yacht, invest the inheritance in a small rental property, or use the entire amount to purchase T-bills. Which one of the following statements is true regarding the risk involved in George's options? A. Donating his inheritance to charity is a pure risk; there is no uncertainty that the money will be gone and George will have no chance of profit. B. Buying a boat is a nondiversifiable risk because George can only afford to purchase a single yacht. C. The rental property presents both pure and speculative risk; property values may increase, and the building could burn down. D. Purchasing T-bills is a pure risk because the interest rate payable is known, and the chance of loss is minimal. Risk can be classified as pure or speculative. Which one of the following is the best example of a speculative risk? A. Acquiring a new television B. Investing in shares of stock C. Buying a new personal vehicle D. Purchasing an insurance policy Which one of the following statements is true regarding enterprise risk management (ERM)? A. ERM is concerned with an organization's pure risk, primarily hazard risk. B. The ERM framework encompasses all stakeholders in the organization. C. In ERM, the risk management function is the responsibility of the safety manager. D. ERM requires less communication than traditional risk management. A risk management plan that considers all of the risks that an organization faces, including operational, financial, and strategic risks, is called A. An enterprise risk management plan. B. An open-perils risk management plan. C. A protected cell risk management plan. D. A hazard risk management plan. The single largest impediment to successful implementation of an enterprise risk management (ERM) program is A. Traditional organizational culture with entrenched risk silos. B. Lack of required skills to effectively implement an ERM program. C. Lack of vision by the management team that leads to under-performance of the ERM plan and early termination. D. Opposition from stakeholders—employees, stockholders, customers, and suppliers. The consensus process by which the veracity of data is confirmed and verified is known as A. Telematics. B. Machine learning. C. The Internet of Things. D. Mining. Which one of the following is a virtual ledger of data that has been verified, timestamped, encrypted, and protected against tampering? A. Artificial intelligence B. The Internet of Things C. Closed-loop system D. Blockchain Which one of the following is the network through which sensors and other smart products capture and transmit data? A. Blockchain B. Cloud C. Artificial intelligence D. Internet of Things Insurers and risk managers can use the large volumes of data collected and organized through telematics to help improve results for which one of the following types of insurance? A. Health B. Workers compensation C. Automobile D. Property Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the A. Cost of implementing and administering risk management. B. Cost of measures to prevent or reduce the size of potential losses. C. Cost of residual uncertainty. D. Cost of losses not reimbursed by insurance. The two benefits of risk management affecting individuals, organizations, and society are: it preserves financial resources by reducing expected losses and it A. Reduces the residual uncertainty associated with risk. B. Increases productivity within the economy and improves overall standard of living. C. Increases the attractiveness to investors. D. Improves the allocation of productive resources. Which one of the following statements is true regarding risk management efforts on the part of individuals, organizations, and society in general? A. Organizations tend to exhibit a greater degree of risk aversion than do individuals. B. The benefits that risk management efforts provide to individuals and organizations are not felt by society in general. C. Risk management makes those who own or run an organization more willing to undertake risky activities. D. Risk management tends to increase the deterrence effect of risk in organizations. Risk management programs should A. Operate economically and efficiently. B. Incur substantial costs for slight benefits. C. Be an autonomous part of the organization. D. Not use benchmarking to compare costs. Which of the following risk management program goals is an essential goal for all public entities? A. Growth B. Continuity of operations C. Earning stability D. Survival Aligning risks with the organization's risk appetite defines A. Compliance. B. Tolerable uncertainty. C. Social responsibility. D. Value at risk. The second step in the risk management process is analyzing loss exposures. Which one of the following is true regarding this step? A. Loss exposures are analyzed based on loss frequency, loss severity, total dollar losses, and timing in this step. B. Loss exposures that could interfere with the achievement of the organization's goals are identified in this step. C. A weakness of loss exposure analysis is that it is useful only for those types of losses that an organization has suffered in the past. D. A major strength of loss exposure analysis is that the process is generally inexpensive. Which one of the following is the first step in the risk management process? A. Examine the feasibility of risk management techniques B. Monitor results and revise the risk management program C. Identify loss exposures D. Analyze loss exposures A risk management program must be monitored and periodically revised, and that revision involves four steps. Which one of the following is one of those four steps? A. Establish results-based rather than activity-based standards of acceptable performance. B. Compare actual results with the established performance standards. C. Reduce any performance standards that have not been achieved by the actual results. D. Return to the first step in the risk management process to identify new loss exposures. After identifying and analyzing loss exposures and evaluating and selecting the appropriate risk management techniques, the next step in the risk management process is to A. Monitor the results. B. Revise the risk management program. C. Implement the selected techniques. D. Decide on risk financing techniques. Risk is a term that is regularly used and that is generally understood in context. As used in this discussion, which one of the following is one of the two elements within the definition of risk? A. Uncertainty of outcome B. Likelihood of injury or damage to property C. Probability of financial loss D. Opportunity for profit Probabilities are stated as a decimal figure, a percentage, or a A. Stated constant. B. Fraction. C. Dollar amount. D. Credibility factor. To understand risk, one needs to know the probability of an outcome or event occurring. Which one of the following statements is correct with respect to probability? A. It is typically expressed verbally rather than numerically. B. It can be used to decide which activities to undertake. C. It verifies that risk is present, but does not quantify it. D. It identifies what can be lost when a negative outcome occurs. Risk involves the possibility of a negative outcome. Possibility means A. The likelihood of an event occurring. B. That an outcome is unavoidable. C. An identified and predictable outcome. D. That an outcome may or may not occur. 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 A. Strategic risk. B. Subjective risk. C. Market risk. D. Speculative risk. The focus of risk quadrants is different from the focus of risk classifications. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on A. Subjective and objective risks. B. The source of risk and who has traditionally managed it. C. Pure and speculative risks. D. The determination of whether the risk is diversifiable. One approach to categorizing risks involves dividing risks into risk quadrants. The risks categorized as hazard risks are A. Traditionally handled by the chief financial officer. B. Speculative risks that fall outside the operational risk category. C. Fundamental to an organization's existence and business plans. D. Traditionally managed by risk management professionals. Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification? A. Private insurance tends to concentrate on nondiversifiable risks; government insurance is often suitable for diversifiable risks. B. The distinction between diversifiable and nondiversifiable risks is clear; risks cannot fall under both classifications simultaneously. C. Inflation, unemployment, and natural disasters, such as hurricanes, are examples of diversifiable risk. D. Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. Conrad Sales Company's vehicles are equipped with a device that allows them to locate each vehicle for tracking purposes. If a vehicle is stolen, the tracking devices can be used to recover the vehicle more quickly. Conrad Sales Company is using the risk management technique of A. Transfer. B. Duplication. C. Loss reduction. D. Loss prevention. Three main theoretical concepts explain why ERM works. Which one of the following correctly lists those three concepts? A. Objective setting, risk response, and monitoring B. Internal environment, event identification, and control activities C. Interdependency, correlation, and portfolio theory D. Risk quantification, silo theory, and statistical correlation Which one of the following is usually the single largest impediment to successful implementation of enterprise risk management (ERM)? A. The traditional organizational culture B. The financial expense C. The legal and regulatory requirements D. The risk management information system The use of data gleaned from sensors to react immediately to hazardous situations is known as A. Forward-thinking risk management. B. Root cause risk management. C. Real-time risk management. D. Looking-backward risk management. Which one of the following products has led to significant improvements in supply chain management by allowing for the immediate identification of discrepancies and interruptions as well as timely actions that can prevent or reduce losses? A. Wearable exoskeleton B. Accelerometer C. Closed-loop system D. Blockchain Which one of the following is the network through which sensors and other smart products capture and transmit data? A. Artificial intelligence B. Internet of Things C. Blockchain D. Cloud The consensus process by which the veracity of data is confirmed and verified is known as A. The Internet of Things. B. Mining. C. Telematics. D. Machine learning. Which one of the following costs is part of the overall financial consequences of risk? A. The cost of benchmarking surveys B. The cost of purchasing an asset C. The cost of the value lost due to events that caused a loss D. The cost of losses reimbursed by insurance As part of its risk management program, a vending company installed a new top of the line security system with an expectation of fewer thefts and A. Higher expected losses. B. Less residual uncertainty. C. Increased anxiety. D. Increased residual uncertainty. Delmond Manufacturing is opening a new manufacturing facility in a building that it purchased from a competitor. Using the information below, which one of the following represents the cost of risk of opening the new facility? New building cost $60.0 million Safety system upgrades $6.0 million Insurance premiums $1.5 million Retained losses $3.0 million Risk management department budget at the site $1.0 million A. $7.0 million B. $10.0 million C. $11.5 million D. $71.5 million (The cost of risk of opening the new facility is $11.5 million, calculated by adding $6 million of safety system upgrades + $1.5 million of insurance premiums + $3 million of retained losses + $1 million of risk management budget at the site) Sean recently started a small consulting practice. Sean is the only employee of the business and the sole generator of revenue. Sean is very concerned that in the event that he becomes disabled due to an accident or disease there will be no revenue coming into the business. Which one of the following goals best identify Sean's concerns? A. Social responsibility and earnings stability B. Legality and profitability C. Tolerable uncertainty and earnings stability D. Economy of risk management operations Which one of the following is essential to an effective risk management program? A. Increased cost of risk B. Reduced waste of resources C. Support from the community as a whole D. Support of the organization's senior management An organization must meet the standard of care that it owes to others in order to ensure that A. Post-loss goals are in place. B. Legal obligations are satisfied. C. Operations are efficient. D. Contracts are not breached. Two steps of the risk management process, when combined, constitute the process of assessing loss exposures. For this reason, they are probably the two most important steps in the process. These two steps are identifying loss exposures and A. Selecting the appropriate risk management techniques. B. Implementing selected risk management techniques. C. Examining feasibility of risk management techniques. D. Analyzing loss exposures. The owner of Harry's Hardware Store is interested in creating a risk management process to help mitigate risk. Harry has already developed much of the process and is currently working to purchase loss reduction devices and contract for loss prevention services. This is an example of which one of the following steps in the risk management process? A. Analyze loss exposures B. Implement the selected risk management techniques C. Select the appropriate risk management techniques D. Identify loss exposures Which one of the following steps required to monitor and revise the risk management program refers to a proper standard that includes specifications for how results or performance will be measured, such as target activity levels or results? A. Correct substandard performance or revise standards that prove to be unrealistic B. Establish standards of acceptable performance C. Compare actual results with standards D. Evaluate standards that have been substantially exceeded Which one of the following is true regarding risk control techniques? A. They are usually used in isolation. B. They minimize the frequency or severity of losses or make losses more predictable. C. They generate funds to finance losses that cannot be prevented. D. They ensure that the estimated frequency and severity of loss remain constant. Which one of the following is correct with respect to the potential financial consequences of a property loss? A. When property is used to secure a loan, only the lender suffers financial consequences if that property is destroyed. B. Bailees need to consider not only their owned property loss exposures, but also the exposures of property held for others. C. Consumers or resellers of property do not suffer a financial loss unless they actually own property when it is damaged. D. When a mortgaged property is destroyed, the mortgagor's loss is limited to the outstanding balance of the loan. A secured lender (secured creditor) A. Acquires conditional rights to property, such as the right to repossess it if loan payments are not made. B. Holds property of others to perform work on it. C. Has a direct ownership interest in the property. D. Purchases insurance to cover the borrower's loss of use of the property should the borrower default on the loan. For insurance purposes, money and securities are separate from other types of contents because A. The insurance industry considers them uninsurable. B. They are not susceptible to the same perils as other property. C. The burden of proof for a loss is on the insurer. D. They are highly susceptible to loss by theft. When property is used to secure a loan, which of the following is exposed to loss? A. Neither the property owner nor the secured lender B. The property owner only C. The property owner and the secured lender D. The secured lender only Angelina borrows money from the bank to purchase a house. The house serves as security for the loan. In this transaction, Angelina is the A. Mortgagor. B. Secured creditor. C. Mortgagee. D. Bailor. Because attorneys, physicians, architects, and engineers are considered to be experts in their fields and are expected to perform accordingly, what liability exposure do they face if a client is injured when such an expert fails to exercise the appropriate standard of care? A. Completed operations B. Business operations C. Professional liability D. Products A completed operations liability loss exposure differs from a products liability loss exposure in that the completed operations liability loss exposure A. Is based solely on strict liability rather than negligence or strict liability. B. Arises out of the entity's completed work, including defective parts or materials furnished with the work. C. Arises out of the entity's defective product, whether or not it has been installed as part of the finished work. D. Is based solely on negligence and breach of warranty rather than strict liability. Telephone Company installs fiber-optic cable using a trenching machine that digs a trench, buries the cable, fills in the trench, and reseeds, all in one pass. The trenching machine can install cable in a fifty-home neighborhood in one day. Soon after the trenching machine passes by, a member of the community steps on the trenched area, sinks in, and breaks his leg. This is an example of a liability loss exposure arising out of A. Premises. B. Products. C. Completed operations. D. Mobile equipment. Products liability loss exposures arise out of injuries or damage that result from an organization's A. Operations away from premises. B. Manufacturing operations. C. Types of bailments. D. Defective product. Anyone who owns or occupies property has a A. Pollution liability loss exposure. B. Products liability loss exposure. C. Professional liability loss exposure. D. Premises liability loss exposure. Dr. Donna Jenkins is a research chemist for PharmaCon, a large pharmaceutical company. Last year, she was responsible for 12 of the 14 patents awarded to PharmaCon. Clearly, the future prospects of the company would be damaged if Dr. Jenkins died or became severely disabled. In risk management parlance, Dr. Jenkins is considered A. An officer. B. A protected employee. C. A director. D. A key employee. The death of a shareholder in a close corporation is often a significant event for the corporation for which one of the following reasons? A. Shareholders in a close corporation also serve on the board of directors resulting in a disparity of shareholder votes. B. The death or disability of one of the shareholders generally results in payment of dividends to the remaining shareholders. C. Ownership in a close corporation is typically concentrated in just the few major shareholders, most of whom are also managers. D. Key shareholders are paid high salaries and are difficult to replace. A company turnover rate well above company and industry averages could be a sign of A. Personnel problems that need to be addressed. B. Claims-consciousness. C. Financial problems that need to be addressed. D. Employee slacking. Other than some type of merger, layoff, or organizational change, which one of the following is an example of a situation where an entire group of employees might leave an organization? A. When an organization offers excessive compensation B. When statutes make it more attractive to pursue other career opportunities C. When the economy is in a long term period of inflation D. When employees follow a manager to a new organization While involuntary employee separations may expose an organization to additional liability loss exposures, such as wrongful termination accusations, they generally are not considered a personnel loss exposure because A. The organization may not have a risk management person measuring personnel exposures. B. The organization has determined that it is better off without that employee. C. Employees leave organizations for non-business related reasons and therefore, are not considered a personnel loss. D. The reasons for involuntary employee separations are too numerous and too varied to be measure with high accuracy. Net income losses can be caused by which one of the following? A. Decreases in expenses B. Decreases in hazard risks C. Increases in expenses D. Increases in revenue An auto dealer's showroom is destroyed by fire, and the dealer has to temporarily rent an adjacent building to use as a showroom. This is an example of A. A reduction in value. B. An altered condition. C. An extra expense. D. Lost income. When property is lost or damaged, the value of the property is decreased. In addition to direct damage to the property, there could be indirect losses to the business. This latter type of loss is known as A. Deferred income. B. Historical income. C. Residual income losses. D. Net income losses. Liability entries on an organization's balance sheet are particularly useful to the risk professional for identifying which one of the following loss exposures? A. Net income B. Personnel C. Obligations such as mortgage payments D. Loss exposures that reduce revenue Which one of the following documents would best help to identify bottlenecks in an organization's operations that might present critical loss exposures? A. Risk assessment questionnaires B. Flowcharts C. Financial statements D. Procedure manuals Which one of the following statements is true regarding the use of checklists and questionnaires to identify loss exposures? A. The completion of standardized checklists helps organizations describe in detail their specific loss exposures and shows how those loss exposures support or affect specific organizational goals. B. The questionnaires developed by insurers, called insurance surveys, relate mainly to loss exposures for which commercial insurance is generally available. C. Standardized risk assessment questionnaires can be used as the sole method to uncover an organization's loss exposures and reveal key information about those exposures. D. An advantage of risk assessment questionnaires is that they can be completed with relatively little expense, time, and effort. Inspections often identify loss exposures that a review of the written descriptions of the organization's operations would not reveal. Which one of the following groups of individuals within the organization are best able to identify non obvious loss exposures to a person conducting an inspection? A. Regional management B. Compliance review personnel C. Front-line personnel D. Risk professionals In the context of identifying loss exposures, hazard analysis is a method A. Used to identify loss exposures arising exclusively from hazard risks. B. That identifies conditions that increase the frequency or severity of loss. C. Used specifically for identifying previously unidentified loss exposures. D. Used to quantify or value potential loss exposures. A commercial building may contain furniture, machinery and equipment, raw materials, and finished products. Which one of the following is the term generally used in property insurance policies to refer to all these types of property? A. Business personal property B. Commercial property C. Stock D. Inventory In property insurance, the term "property in transit" refers to which one of the following? A. Property while being moved from one building to another at the insured location only B. Owned property while located anywhere other than the insured location C. Mobile equipment while moving under its own power from one work location to another D. Property while being transported by trucks, cars, buses, trains, airplanes, and ships For property insurance purposes, wall-to-wall carpeting is typically considered to be part of the building because it A. Is easy to value. B. Is readily visible. C. Is permanently attached to the building.