CPCU 500 - Foundations Of Risk Management And
Insurance Updated2023-2024 /Questions And Answers
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Quiz :What are the two elements of risk? - Answer :-Uncertainty of outcome -
Time of the outcome and type of outcome are uncertain
-possibility of a negative outcome - at least 1 outcome is negative
Quiz :What is the difference between probability and possibility? -
Answer :Possibility - an outcome or event may or may not occur. It does not
quantify the risk, only verifies the risk is there
Probability - the likelihood than an outcome will occur, quantifies the risk. It is
measurable and has value between zero and one
Quiz :How does probability help an organizations risk management exposure?
- Answer :-by understanding the probability of an exposure, an organization
can focus its risk management efforts to avoid it.
-helps organization decided what projects and activities to undertake
Quiz :How does classifying a risk help an organizations risk management
process? - Answer :-can help with assessing risk cause many risks in the same
classification have similar attributes
-helps manage risks
-helps administrative function of RM by helping to ensure the risks in same
class are less likely to be overlooked
Quiz :-Compare pure risk with speculative risk
-why is it important to distinguish between the 2 what making risk
management proceduces - Answer :pure risk - change of loss or no loss but no
gain
speculative risk - involves a chance of gain
type of SR includes: price risk and credit risk (financial investments involve a
distinct set of speculative risks)
its important when making RM decisions cause the 2 types must often be
managed different. *most insurance policies are not designed to handle
speculative risks*
*insurable risks are generally classified as pure, objective, and diversafiable*
, Quiz :- How does subjective and objective risk differ? - Answer :subjective risk
- perceived amount of risk based on individuals or organizations opinion
objective risk - measurable variation in uncertain outcomes based on facts and
data
where they differ (see page 1.8):
1. Familiarity and control
2. consequences over likelihood
3. Risk Awareness
Quiz :-Contracts diversifiable and nondiversifiable risk? - Answer :diversifiable
risk - is not highly correlated and can be managed through diversification
non-d risk - is correlated, losses and gains occur together (type: systemic risk -
potential for a major disruption in the function of an entire market or financial
system
Quiz :- Describe the quadrants of risk - Answer :way of categorizing risk is
putting them in quadrants:
-hazard risk - property, liability, and personnel loss, generally the subject of
insurance
-operational risks - fall outside hazard cat, arise from people or failure in
process, system, or control, including info tech
-financial risks - effect of market forces on financial assets or liabilities and
include market risk, credit risk, liquidity risk and price risk
-strategic risks - arise from trends in the economy and society, including
changes in econ, political and competitive environments, as well as from
demographic shirts
*see graph on 1.10*
Quiz :What are the 3 components to constitute the financial consequence of
risk faced by individuals or organizations? - Answer :- expected cost of losses
or gains
- expenditures on RM
- cost of residual uncertainty
Quiz :What are hidden costs that can affect an organization's calculation of
expected costs of loss? - Answer :-time lost by the injured employee
-time lost by other employees who stop work
-time lost by foremen, supervisors or other execs
-time spent on the case by first-aid attendants and hospital department staff
-damage to equipment
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