CPCU 500 - Foundations of Risk Management and Insurance 100% Correct Answers Verified Latest 2024 Version
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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
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CPCU 500 - Foundations of Risk Management
and Insurance | 100% Correct Answers | Verified
| Latest 2024 Version
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
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