CFP FP512 - Risk Management and
insurance UPDATED ACTUAL Questions
and CORRECT Answers
Risk - CORRECT ANSWER The possibility of a loss
Peril - CORRECT ANSWER The cause of a loss
Hazard - CORRECT ANSWER Increases the potential for a loss
Static Risk - CORRECT ANSWER Result from factors other than changes in the economy
- Earthquake, Flood
Dynamic Risk - CORRECT ANSWER Result of changes in the economy, such as changes
in the business cycle or inflation. Insurance does not typically cover dynamic risks
Fundamental Risk - CORRECT ANSWER Risk that can affect many people at once
(earthquake, Recession)
Particular Risk - CORRECT ANSWER Risk that affects Individuals or small groups of
people
Pure Risk - CORRECT ANSWER A risk that presents the chance of loss but no
opportunity for gain - Home burning down
Speculative Risk - CORRECT ANSWER A risk that presents the chance of a gain or a loss
- gambling, investing - not insurable
,What is the average amount of income spent on risk protection? - CORRECT
ANSWER At least 10%
Asset related risk exposure - CORRECT ANSWER Loss of the asset itself, loss of use of
the asset, and other associated losses - home after flood or fire, car after accident or damage
Risk of liability based on contract law - CORRECT ANSWER acquisition of an asset
resulting in liability to a lender, a club membership contract putting certain responsibilities on the
client, etc.
Risk of liability based on tort law - CORRECT ANSWER Liability for a loss resulting
from the use of an asset or from an activity—a boating accident, practicing one's profession, etc.
Risk Control - CORRECT ANSWER Seeks to minimize the risk of a loss: Avoidance and
reduction
Risk Financing - CORRECT ANSWER Risk management technique that pays the costs of
losses incurred: Retention and transfer
Avoidance - CORRECT ANSWER Not doing an activity that has a risk of loss - deciding
not to drive in the snow, not playing a sport to avoid injury
Reduction - CORRECT ANSWER Doing an activity that has a risk of loss but taking
precautions to reduce the risk - Going skiing but wearing a helmet and staying in easier trails,
driving in the snow but getting new tires and brakes first
Retention - CORRECT ANSWER The potential loss is small and the business or
individual believes any losses that occur can be covered out of pocket. It is also possible that the
cost of transferring the risk is high, so there may be no reasonable alternative
Transfer - CORRECT ANSWER This is primarily insurance, but can also be accomplished
through waivers or subcontracting. With insurance, the risk of loss is transferred to an insurance
, company in exchange for a relatively small cost, the premium. Health, life, disability, and
liability risks are examples that are generally transferred.
Risk management matrix - CORRECT ANSWER
Self-insurance - CORRECT ANSWER Self-insurance is a method of risk retention by
large companies that has several requirements:
-The organization should have enough homogeneous exposure units to make losses somewhat
predictable.
-Adequate funds must be accumulated to cover plan losses.
-The self-insurer must be able to administer the insurance functions, such as analysis of potential
claims, disbursement of payments to providers, and objective determination of claim validity, as
efficiently as an insurance company would.
-The self-insurer must be able to competently manage investment of the self-insurance fund.
Underwriting - CORRECT ANSWER Process of gathering as much information on the
risk exposure as possible in order to:
-determine if the exposure meets the requirements of an insurable risk
-decide whether it is practical for the insurer to provide insurance against this particular risk
-establish how the insurance should be priced.
Elements of an Insurable Risk - CORRECT ANSWER -There must be a sufficiently large
number of homogeneous exposure units to make losses reasonably predictable (i.e., the law of
large numbers)
-The loss resulting from the risk must be definite and measurable
-The loss must be fortuitous or accidental
-The loss must not be catastrophic to the company.
Law of Large Numbers - CORRECT ANSWER There must be a large number of similar
potential losses so that the insurer can reasonably apportion the expected financial loss
insurance UPDATED ACTUAL Questions
and CORRECT Answers
Risk - CORRECT ANSWER The possibility of a loss
Peril - CORRECT ANSWER The cause of a loss
Hazard - CORRECT ANSWER Increases the potential for a loss
Static Risk - CORRECT ANSWER Result from factors other than changes in the economy
- Earthquake, Flood
Dynamic Risk - CORRECT ANSWER Result of changes in the economy, such as changes
in the business cycle or inflation. Insurance does not typically cover dynamic risks
Fundamental Risk - CORRECT ANSWER Risk that can affect many people at once
(earthquake, Recession)
Particular Risk - CORRECT ANSWER Risk that affects Individuals or small groups of
people
Pure Risk - CORRECT ANSWER A risk that presents the chance of loss but no
opportunity for gain - Home burning down
Speculative Risk - CORRECT ANSWER A risk that presents the chance of a gain or a loss
- gambling, investing - not insurable
,What is the average amount of income spent on risk protection? - CORRECT
ANSWER At least 10%
Asset related risk exposure - CORRECT ANSWER Loss of the asset itself, loss of use of
the asset, and other associated losses - home after flood or fire, car after accident or damage
Risk of liability based on contract law - CORRECT ANSWER acquisition of an asset
resulting in liability to a lender, a club membership contract putting certain responsibilities on the
client, etc.
Risk of liability based on tort law - CORRECT ANSWER Liability for a loss resulting
from the use of an asset or from an activity—a boating accident, practicing one's profession, etc.
Risk Control - CORRECT ANSWER Seeks to minimize the risk of a loss: Avoidance and
reduction
Risk Financing - CORRECT ANSWER Risk management technique that pays the costs of
losses incurred: Retention and transfer
Avoidance - CORRECT ANSWER Not doing an activity that has a risk of loss - deciding
not to drive in the snow, not playing a sport to avoid injury
Reduction - CORRECT ANSWER Doing an activity that has a risk of loss but taking
precautions to reduce the risk - Going skiing but wearing a helmet and staying in easier trails,
driving in the snow but getting new tires and brakes first
Retention - CORRECT ANSWER The potential loss is small and the business or
individual believes any losses that occur can be covered out of pocket. It is also possible that the
cost of transferring the risk is high, so there may be no reasonable alternative
Transfer - CORRECT ANSWER This is primarily insurance, but can also be accomplished
through waivers or subcontracting. With insurance, the risk of loss is transferred to an insurance
, company in exchange for a relatively small cost, the premium. Health, life, disability, and
liability risks are examples that are generally transferred.
Risk management matrix - CORRECT ANSWER
Self-insurance - CORRECT ANSWER Self-insurance is a method of risk retention by
large companies that has several requirements:
-The organization should have enough homogeneous exposure units to make losses somewhat
predictable.
-Adequate funds must be accumulated to cover plan losses.
-The self-insurer must be able to administer the insurance functions, such as analysis of potential
claims, disbursement of payments to providers, and objective determination of claim validity, as
efficiently as an insurance company would.
-The self-insurer must be able to competently manage investment of the self-insurance fund.
Underwriting - CORRECT ANSWER Process of gathering as much information on the
risk exposure as possible in order to:
-determine if the exposure meets the requirements of an insurable risk
-decide whether it is practical for the insurer to provide insurance against this particular risk
-establish how the insurance should be priced.
Elements of an Insurable Risk - CORRECT ANSWER -There must be a sufficiently large
number of homogeneous exposure units to make losses reasonably predictable (i.e., the law of
large numbers)
-The loss resulting from the risk must be definite and measurable
-The loss must be fortuitous or accidental
-The loss must not be catastrophic to the company.
Law of Large Numbers - CORRECT ANSWER There must be a large number of similar
potential losses so that the insurer can reasonably apportion the expected financial loss
