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CPCU 500 - Foundations of Risk Management and Insurance Exam Questions and Answers
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CPCU 500 - Foundations of Risk Managementand Insurance Exam Questions and Answers
CHAPTER 1 - -...
-What are the two elements of risk? - --Uncertainty of outcome - Time of the
outcome and type of outcome are uncertain
-possibility of a negative outcome - at least 1 outcome is negative
-What is the difference between probability and possibility? - -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
-How does probability help an organizations risk management exposure? -
--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
-How does classifying a risk help an organizations risk management
process? - --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
--Compare pure risk with speculative risk
-why is it important to distinguish between the 2 what making risk
management proceduces - -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*
-- How does subjective and objective risk differ? - -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
--Contracts diversifiable and nondiversifiable risk? - -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
-- Describe the quadrants of risk - -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*
-What are the 3 components to constitute the financial consequence of risk
faced by individuals or organizations? - -- expected cost of losses or gains
- expenditures on RM
- cost of residual uncertainty
-What are hidden costs that can affect an organization's calculation of
expected costs of loss? - --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
-interference with production
-continuation of injured employees wages
-loss of profit on injured employees productivity and on idle machines
-lost productivity because of employees excitement or weakened moral from
the accident
-overhead per injured employee that continues while the employee is not
productive
-What are the costs of residual uncertainty? - -residual uncertainty is the
level of risk that remains after individuals or organizations implement their
RM programs
-cost of this uncertainty is hard to measure
-for individ - cost includes lost salary or forgone invest opportunities
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