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CPCU 500 Exam (1, 2, 3)
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CPCU 500 Exam (1, 2, 3)
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CPCU 500 Exam (1, 2, 3)Two elements of risk - --uncertainty of outcome
-possibility of a negative outcome
-Uncertainty - -About the type of outcome, timing of outcome, or both
-Possibility - -An outcome or event may or may not occur
*Does not quantify risk
-Probability - -Likelihood that an outcome or event will occur
*Measurable, quantifies risk, value between zero and one
-Explain how understanding various outcome probabilities can aid an
organization in its risk management efforts - -1. An org can focus its rm
efforts on risk that can be appropriately managed
2. Can use probabilities to decide which activities to undertake and which
risk management techniques to use
-Explain how classifying and categorizing risk help org's meet its rm goals -
-1. Classification can help with assessing risks since many risks in the same
classification have the same attributes
2. Can help manage risks since many risks in the same classification can be
managed with the same techniques
3. Classification helps with admin function by helping ensure risks of the
same function aren't overlooked
-Pure risk - -Chance of loss or no loss but no chance of gain
-Speculative risk - -Chance of loss, no loss, or gain
-What is price risk and credit risk? - -1. Price risk: Uncertainty over the size
of cash flows resulting from possible changes in the cost of raw materials
and other inputs
2. Credit risk: Risk that customers or other creditors will fail to make
promised payments as they come due
-Why must companies distinguish between pure and speculative risk? - -The
two risks are managed differently and speculative is usually not covered by
insurance policies
-Subjective risk - -The perceived amount of risk based on an individual's or
organization's opinion
, -Objective risk - -The measurable variation in uncertain outcomes based on
facts and data.
-3 ways subjective and objective risk differ - -1. Familiarity and Control:
i.e people think air travel more dangerous than driving your car
2. Consequences over likelihood:
i.e people's perceptions of low-likelihood high-consequence events differ
3. Risk awareness:
i.e Org's perceive risk differently; one not aware of risks would perceive the
likelihood of something happening as very low
-Diversifiable risk - -Not highly correlated and can be managed through
diversification, or spread, of risk
-Nondiversifiable risk - -A risk that affects a large segment of society at the
same time. Gains or losses tend to happen simultaneously rather than
randomly
-Systemic Risk - -Potential for a major disruption in the function of an entire
market or financial system
-Market Risk - -Uncertainty about an investment's future value because of
potential changes in the market for that type of investment
-Iiquidity Risk - -the risk that an asset cannot be sold on short notice
without incurring a loss
-One way an org can categorize its risks: - -A risk quadrant
-List the elements of the risk quadrant - -1. Hazard risks: Arise from
property, liability, or personnel loss exposures and are generally the subject
of insurance
2. Operational risks: Risks that fall outside of hazard risk category and arise
from people or failure in processes, systems, or controls
3. Financial risks: Arise from the effect of market forces on financial assets or
liabilities including market risk, credit risk, liquidity risk, price risk
4. Strategic risks: Arise from trends in the economy and society, including
changes in the economic, political, and competitive environments as well as
demographic shifts
-Which risks in the quadrant are pure risks? - -Hazard and operational
-Which risks in the quadrant are speculative risks? - -Financial and strategic
, -What falls under hazard risk? - -Property, legal, personnel, consequential
risks
-What falls under operational risk? - -People, IT, Management oversight,
business processes risk
-What falls under financial risk? - -Market, credit, price, and liquidity risk
-What falls under strategic risk? - -Economic environment, political
environment, demographics, competition
-Enterprise Risk Management - -An approach to managing all of an
organization's key business risks and opportunities with the intent of
maximizing shareholder value.
-Describe the common concept among various definitions of enterprise risk
management - -All include the concept of managing an org's risks to help
the org meet its objective
-Identify the three main theoretical pillars of ERM (enterprise risk
management) - -1. Interdependency: Traditional assumes all risks are
independent of one another
2. Correlation: Assumes risks are correlated
3. Portfolio theory: Assumes risk includes both individual risks and their
interactions
-Compare traditional risk management function with ERM - -Traditional:
There is a risk manager and risk management department to manage hazard
risks; mainly provides risk transfer for the org
ERM: Responsibility of risk management function is broader and includes all
of org's risks (operational, financial, strategic) not just hazard risks. Entire
org at all levels become responsible for risk management (since the
framework encompasses all stakeholders)
-Role of Chief Risk Officer in ERM - -Reports to the CEO and board risk
committee
Facilitator in ERM; engages org's management in convos that establish risk
strategic goals in relation to the SWOT
Creates a culture where managers of the org's divisions and units, and
individuals become risk owners
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