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CFP EXAM - RISK MANAGEMENT,
INSURANCE, AND EMPLOYEE BENEFITS
PLANNING QUESTIONS WITH DETAILED
VERIFIED ANSWERS
peril Ans: cause of financial loss
hazard Ans: increases the probability that a loss will occur
static risk Ans: losses that are caused by factors other than a change in
the economy, risks that are always present
dynamic risk Ans: the result of the economy changing; insurance does
not cover these risks
pure risk Ans: A chance of loss or no loss, but no chance of gain; is
insurable
speculative risk Ans: chance of both loss or gain and is not insurable
(gambling)
Risk Management Process Ans: 1. determine the objectives of the risk
management plan
2. identify the risks
3. evaluate the identified risks and the probability of occurrence
4. determine alternatives for managing risks and select alternative risks
5. implement most appropriate alternative
6. evaluate and review periodically
risk retention Ans: no action is taken to avoid, transfer, or reduce risk
(self-insurance)
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an insurable risk has four elements: Ans: 1. There must be a large and
similar sample of individuals to make the losses predictable
2. loss must be measurable and indefinite
3. loss must be accidental
4. loss cannot be catastrophic to society
Adverse selection Ans: the likelihood that people with highest risk of loss
are also most likely to buy insurance
An enforceable contract contains Ans: 1. offer and acceptance (
underwriting)
2. consideration (exchange of value)
3. legal object (must be a legal situation)
4. legal capacity (no minors or incompetents)
5. legal form (written usually, filed)
Actual Cash Value (ACV) Ans: Cost to replace property with new
property of like kind and quality less depreciation.
ACV = RCV - Depreciation
Estoppel Ans: A legal impediment to denying a fact or restoring a right
that has been previously waived.
personal contract Ans: insurance is non-transferable (life insurance is
exception)
Contract of Indemnity Ans: insured may recover from insurance
company only up to actual financial loss (life insurance is exception)
Subrogation Ans: The process by which an insurer can, after it has paid
a loss under the policy, recover the amount paid from any party (other
CFP EXAM - RISK MANAGEMENT,
INSURANCE, AND EMPLOYEE BENEFITS
PLANNING QUESTIONS WITH DETAILED
VERIFIED ANSWERS
peril Ans: cause of financial loss
hazard Ans: increases the probability that a loss will occur
static risk Ans: losses that are caused by factors other than a change in
the economy, risks that are always present
dynamic risk Ans: the result of the economy changing; insurance does
not cover these risks
pure risk Ans: A chance of loss or no loss, but no chance of gain; is
insurable
speculative risk Ans: chance of both loss or gain and is not insurable
(gambling)
Risk Management Process Ans: 1. determine the objectives of the risk
management plan
2. identify the risks
3. evaluate the identified risks and the probability of occurrence
4. determine alternatives for managing risks and select alternative risks
5. implement most appropriate alternative
6. evaluate and review periodically
risk retention Ans: no action is taken to avoid, transfer, or reduce risk
(self-insurance)
, Page | 2
an insurable risk has four elements: Ans: 1. There must be a large and
similar sample of individuals to make the losses predictable
2. loss must be measurable and indefinite
3. loss must be accidental
4. loss cannot be catastrophic to society
Adverse selection Ans: the likelihood that people with highest risk of loss
are also most likely to buy insurance
An enforceable contract contains Ans: 1. offer and acceptance (
underwriting)
2. consideration (exchange of value)
3. legal object (must be a legal situation)
4. legal capacity (no minors or incompetents)
5. legal form (written usually, filed)
Actual Cash Value (ACV) Ans: Cost to replace property with new
property of like kind and quality less depreciation.
ACV = RCV - Depreciation
Estoppel Ans: A legal impediment to denying a fact or restoring a right
that has been previously waived.
personal contract Ans: insurance is non-transferable (life insurance is
exception)
Contract of Indemnity Ans: insured may recover from insurance
company only up to actual financial loss (life insurance is exception)
Subrogation Ans: The process by which an insurer can, after it has paid
a loss under the policy, recover the amount paid from any party (other
