CPCU 500 EXAM QUESTIONS WITH VERIFIED
CORRECT ANSWERS
QUESTION>Which one of the following is a federal insurance plan in which the government acts as a
partner with a private insurer that sells insurance and pays the claims, and then reimburses the insurer
for the portion of losses that exceeds premiums and investment income?
Choose one answer.
A. Beach and Windstorm Plan
B. National Flood Insurance Program (NFIP)
C. Terrorism Risk Insurance Program (TRIP)
D. Residual Auto Plan - CORRECT ANSWER~B. National Flood Insurance Program (NFIP)
QUESTION>Two individuals each have a 75 percent probability of not suffering a homeowners loss in a
given year. Assuming that losses involving these two homes are independent of one another, and that
the two individuals enter into a pooling arrangement, which one of the following represents the
probability of neither individual suffering a loss?
Choose one answer.
A. .00
B. .56
C. .75
D. 1.5 - CORRECT ANSWER~B. .56
QUESTION>The primary role of insurance is to
Choose one answer.
A. Make a profit for the insurance company's shareholders.
B. Educate individuals and organizations about loss prevention.
C. Indemnify individuals and organizations for covered losses.
D. Sell insurance policies to individuals and organizations. - CORRECT ANSWER~C. Indemnify individuals
and organizations for covered losses.
, QUESTION>Delmond Corporation wishes to purchase key person life insurance to provide a financial
cushion against the loss of its chief executive officer (CEO). This exposure may fail to meet which one of
the following characteristics of an ideally insurable risk?
Choose one answer.
A. Definite in location
B. Definite in time
C. Measurable
D. Pure risk - CORRECT ANSWER~C. Measurable
QUESTION >For public entities such as cities, counties and public utilities, which one of the following is
normally the most important post-loss risk management goal?
Choose one answer.
A. Growth
B. Profitability
C. Continuity of operations
D. Earnings stability - CORRECT ANSWER~C. Continuity of operations
QUESTION>Which one of the following is the goal of enterprise-wide risk management (ERM)?
Choose one answer.
A. Coordinate loss reduction efforts
B. Reduce risk management costs
C. Decentralize control of business decisions
D. Maximize the organization's value - CORRECT ANSWER~D. Maximize the organization's value
QUESTION>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?
Choose one answer.
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. - CORRECT
ANSWER~B. Compare actual results with the established performance standards.
QUESTION>Risk can be classified as subjective or objective. Which one of the following statements is
correct with respect to these risk classifications?
Choose one answer.
A. Subjective risk is risk associated with individuals; objective risk is risk associated with objects or
things.
B. Risk managers focus on objective risk and attempt to avoid allowing subjective risk to affect their
decisions.
C. Subjective risk can exist even where objective risk does not.
D. Individuals' subjective perception of risk in a given set of circumstances is typically much higher than
the objective risk. - CORRECT ANSWER~C. Subjective risk can exist even where objective risk does not.
QUESTION>JNL Construction is a general contractor. As the risk management professional for JNL, Marie
should be aware of the company's contractual obligations, as well as the contractual obligations that
others owe JNL. This knowledge is necessary for Marie to meet which one of the following pre-loss risk
management goals?
Choose one answer.
A. Legality
B. Social responsibility
C. Tolerable uncertainty
D. Continuity of operations - CORRECT ANSWER~A. Legality
QUESTION>Residual uncertainty is the level of risk that remains after organizations implement their risk
management plans. Which one of the following statements is correct with respect to residual
uncertainty?
Choose one answer.
A. Residual uncertainty is an objective measure, independent of an organization's subjective view of the
risks to which it is exposed.
B. The cost of residual uncertainty is relatively easy to calculate and comprises an important part of any
cost of risk study.
, C. Residual uncertainty can be minimized, but doing so is costly because more has to be spent on
attempts to control or finance the risks involved.
D. Cost of residual uncertainty is a factor only in the case of speculative risk; it is not a consideration
where pure risk is concerned. - CORRECT ANSWER~C. Residual uncertainty can be minimized, but doing
so is costly because more has to be spent on attempts to control or finance the risks involved.
QUESTION>Tania has been unemployed for six months, and her unpaid bills are mounting. She recently
damaged the front fender of her vehicle after running off the road. When seeking repairs to the vehicle,
she convinced the auto body shop to include damages from previous incidents in the estimate. This
would allow her to collect extra money from her insurer. From an insurance and risk management
perspective, Tania's behavior is indicative of a
Choose one answer.
A. Legal hazard.
B. Moral hazard.
C. Morale hazard.
D. Physical hazard. - CORRECT ANSWER~B. Moral hazard.
QUESTION>Which one of the following describes how an effective risk management program should
support an organization's pre-loss operational goals?
Choose one answer.
A. It should ensure that risk management costs are kept to a minimum.
B. It should eliminate uncertainty by identifying and managing loss exposures.
C. It should help ensure that the organization's legal obligations are satisfied.
D. It should ensure that no conflicts exist among the pre-loss goals. - CORRECT ANSWER~C. It should
help ensure that the organization's legal obligations are satisfied.
QUESTION>Which one of the following statements is true regarding risk management techniques?
Choose one answer.
A. Data based on objective risk factors are usually the only criteria considered in determining
appropriate risk management techniques.
B. The risk management techniques selected by for-profit organizations should be both effective in
meeting the organizations' goals and economical.
CORRECT ANSWERS
QUESTION>Which one of the following is a federal insurance plan in which the government acts as a
partner with a private insurer that sells insurance and pays the claims, and then reimburses the insurer
for the portion of losses that exceeds premiums and investment income?
Choose one answer.
A. Beach and Windstorm Plan
B. National Flood Insurance Program (NFIP)
C. Terrorism Risk Insurance Program (TRIP)
D. Residual Auto Plan - CORRECT ANSWER~B. National Flood Insurance Program (NFIP)
QUESTION>Two individuals each have a 75 percent probability of not suffering a homeowners loss in a
given year. Assuming that losses involving these two homes are independent of one another, and that
the two individuals enter into a pooling arrangement, which one of the following represents the
probability of neither individual suffering a loss?
Choose one answer.
A. .00
B. .56
C. .75
D. 1.5 - CORRECT ANSWER~B. .56
QUESTION>The primary role of insurance is to
Choose one answer.
A. Make a profit for the insurance company's shareholders.
B. Educate individuals and organizations about loss prevention.
C. Indemnify individuals and organizations for covered losses.
D. Sell insurance policies to individuals and organizations. - CORRECT ANSWER~C. Indemnify individuals
and organizations for covered losses.
, QUESTION>Delmond Corporation wishes to purchase key person life insurance to provide a financial
cushion against the loss of its chief executive officer (CEO). This exposure may fail to meet which one of
the following characteristics of an ideally insurable risk?
Choose one answer.
A. Definite in location
B. Definite in time
C. Measurable
D. Pure risk - CORRECT ANSWER~C. Measurable
QUESTION >For public entities such as cities, counties and public utilities, which one of the following is
normally the most important post-loss risk management goal?
Choose one answer.
A. Growth
B. Profitability
C. Continuity of operations
D. Earnings stability - CORRECT ANSWER~C. Continuity of operations
QUESTION>Which one of the following is the goal of enterprise-wide risk management (ERM)?
Choose one answer.
A. Coordinate loss reduction efforts
B. Reduce risk management costs
C. Decentralize control of business decisions
D. Maximize the organization's value - CORRECT ANSWER~D. Maximize the organization's value
QUESTION>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?
Choose one answer.
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. - CORRECT
ANSWER~B. Compare actual results with the established performance standards.
QUESTION>Risk can be classified as subjective or objective. Which one of the following statements is
correct with respect to these risk classifications?
Choose one answer.
A. Subjective risk is risk associated with individuals; objective risk is risk associated with objects or
things.
B. Risk managers focus on objective risk and attempt to avoid allowing subjective risk to affect their
decisions.
C. Subjective risk can exist even where objective risk does not.
D. Individuals' subjective perception of risk in a given set of circumstances is typically much higher than
the objective risk. - CORRECT ANSWER~C. Subjective risk can exist even where objective risk does not.
QUESTION>JNL Construction is a general contractor. As the risk management professional for JNL, Marie
should be aware of the company's contractual obligations, as well as the contractual obligations that
others owe JNL. This knowledge is necessary for Marie to meet which one of the following pre-loss risk
management goals?
Choose one answer.
A. Legality
B. Social responsibility
C. Tolerable uncertainty
D. Continuity of operations - CORRECT ANSWER~A. Legality
QUESTION>Residual uncertainty is the level of risk that remains after organizations implement their risk
management plans. Which one of the following statements is correct with respect to residual
uncertainty?
Choose one answer.
A. Residual uncertainty is an objective measure, independent of an organization's subjective view of the
risks to which it is exposed.
B. The cost of residual uncertainty is relatively easy to calculate and comprises an important part of any
cost of risk study.
, C. Residual uncertainty can be minimized, but doing so is costly because more has to be spent on
attempts to control or finance the risks involved.
D. Cost of residual uncertainty is a factor only in the case of speculative risk; it is not a consideration
where pure risk is concerned. - CORRECT ANSWER~C. Residual uncertainty can be minimized, but doing
so is costly because more has to be spent on attempts to control or finance the risks involved.
QUESTION>Tania has been unemployed for six months, and her unpaid bills are mounting. She recently
damaged the front fender of her vehicle after running off the road. When seeking repairs to the vehicle,
she convinced the auto body shop to include damages from previous incidents in the estimate. This
would allow her to collect extra money from her insurer. From an insurance and risk management
perspective, Tania's behavior is indicative of a
Choose one answer.
A. Legal hazard.
B. Moral hazard.
C. Morale hazard.
D. Physical hazard. - CORRECT ANSWER~B. Moral hazard.
QUESTION>Which one of the following describes how an effective risk management program should
support an organization's pre-loss operational goals?
Choose one answer.
A. It should ensure that risk management costs are kept to a minimum.
B. It should eliminate uncertainty by identifying and managing loss exposures.
C. It should help ensure that the organization's legal obligations are satisfied.
D. It should ensure that no conflicts exist among the pre-loss goals. - CORRECT ANSWER~C. It should
help ensure that the organization's legal obligations are satisfied.
QUESTION>Which one of the following statements is true regarding risk management techniques?
Choose one answer.
A. Data based on objective risk factors are usually the only criteria considered in determining
appropriate risk management techniques.
B. The risk management techniques selected by for-profit organizations should be both effective in
meeting the organizations' goals and economical.
