CPCU 551 Exam Prep Questions with Answers An example of an administrative expense that can minimize the cost of risk is ✅Risk management consulting The availability of funds to pay for losses is most important to organizations when ✅Operations have been disrupted A self -supporting solid wall that prevents a fire from passing through or around it is a ✅Fire wall A building with concrete exterior walls and wooden support beams as defined by Insurance Services Office, Inc. (ISO) ✅Joisted masonry The analysis step of the risk management process involves considering the four dimensions of a loss exposure. If any of these dimensions of loss exposure analysis involve empirical distributions developed from past losses, what needs to be determined? ✅The credibility of the data being used In theory, liability losses are limited only by the ✅Defendant's total wealth Customer Mary gave dry cleaner Ike her fur coat so he could remove a large stain. Ike could not eliminate the stain so he asked restoration specialist Peter to attempt to remove it. The bailor in this scenario is ✅Mary Jack and Susan own and manage a hotel. They are concerned about their responsibility for the property of their guests and whether they have an insurable interest in that property and thus could buy insurance to cover their responsibility. Most courts would hold that they do have an insurable interest in their guests' property based on the legal basis of ✅Exposure to legal liability What is the primary advantage of using retention as a risk financing measure to help an organization meet its risk financing goals? ✅Managing the cost of risk One way of jointly considering frequency and severity is to combine both frequency and severity into ✅A total claims distribution What type of captive typically operates as a formalized retention plan rather than a transfer measure? ✅Single -parent captive What is correct with respect to retention's ability to meet risk financing goals? ✅Retention enables an organization to manage its cost of risk Martin enters a warehouse by smashing a basement window and climbing through the opening. He steals supplies and a box of petty cash and exits the building through the same window. This is an example of what type of theft? ✅Burglary If the organization wishes to pre -fund for retained future losses, it must determine the present value of the expected future losses. Calculating the present value of a future amount is known as ✅Discounting What is used for a rating plan whereby the insured receives a premium reduction for agreeing to reimburse the insurer for losses up to a substantial per accident or per occurrence limit? ✅Large deductible plan Many states require a self -insurer to ✅Purchase excess insurance In insurance terminology, trucks, trailers, buses, fire engines, and ambulances designed for road use are examples of what category of motor vehicle? ✅Autos Perils are an important aspect of property insurance. What is correct with respect to perils? ✅A peril is the actual means by which property is damaged or destroyed such as fire, lightning, windstorm, hail or theft. A commercial building may contain furniture, machinery and equipment, raw materials, and finished products. What is the term generally used in property insurance policies to refer to all these types of property? ✅Business personal property What is a characteristic of an organization that would be more appropriate for risk transfer than risk retention? ✅Weak financial condition To achieve the financial goal of maximizing market value, most publicly traded organizations should pursue risk financing goals. Common risk financing goals include ✅Managing uncertainty of loss outcomes The best method of treating the loss exposure of flood when constructing a building is ✅Locating in an area with no prior flood experience A pool can meet the risk financing goal of minimizing the cost of risk through ✅Economies of scale administration What is true regarding the selection of appropriate risk financing measures? ✅It is typically more economical for an organization to retain rather than transfer loss exposures directly related to its core operations Two of the most common applications of relative frequency measures in risk management are injuries per person per hour in works compensation and ✅Auto accidents per mile driven What is correct with respect to retrospective rating plans? ✅An organization must have a substantial insurance premium to benefit from retrospective rating What is correct with respect to the timing dimension in the analysis of loss exposures? ✅Money held in reserve to pay for a loss can earn interest until the actual payment is made Each insured member of a pool contributes premium based on its loss exposures. In exchange, ✅The pool pays for each insured's covered losses Ships and their cargoes represent a special category of property insurance. What is correct with respect to this category? ✅Even more than other property, ocean cargoes fluctuate in value according to their location In insurance terminology, equipment such as tractors, bulldozers, road graders, front -
end loaders, and forklifts designed primarily for off -road use are considered to be ✅Mobile equipment Sandi purchased a $130,000 home three years ago and took out a $100,000 mortgage. Today her home is worth $150,000 and she still owes $55,000 on the home. The mortgage holder has an insurable interest of how much in Sandi's home? ✅$55,000 A hazard is defined as ✅Anything that increases the frequency or the severity of a loss Charlotte, Chloe, and Jessica have concurrent ownership in a restaurant, each owning one third. Their combined interests equal the value of the restaurant. If one of them should die, her share would pass to her heirs. This type of ownership is referred to as ✅Tenancy in common Securing outside materials and maintaining roof tie -downs are risk control measures particularly important for the peril of ✅Windstorm One dimension of analyzing loss exposures is timing of losses. The timing of losses is significant because ✅Money held in reserve to pay for a loss can earn interest until the actual payment is made A risk financing goal is ✅Managing uncertainty of loss outcomes When analyzing loss exposures, total dollar losses can be determined by multiplying loss frequency by ✅Loss severity In loss analysis, the Prouty approach primarily involves ✅Loss frequency and severity What is true regarding the risk financing goal of maintaining an appropriate level of liquidity? ✅Both the amount of cash to pay for retained losses and the timing of the payments are important in deciding on an appropriate level of liquidity. Captive insurers are ✅Sometimes used to insure property loss exposures that are difficult to insure in the primary market Jeremy is a bailee who insures bailor Sam's property for Sam's benefit. Jeremy has an insurable interest in the property, but if Sam's property becomes damaged or destroyed, Jeremy ✅Pays any awarded insurance proceeds to Sam Generally, funds used to pay for property losses are ✅Disbursed relatively soon after the losses occur Bentley Organization has a retrospective rating plan. It experiences $1.5 million in losses subject to the policy limit; however, Bentley's adjusted premium is limited to $1 million. This is likely because ✅Bentley has a maximum premium of $1 million Many businesses have refrigeration equipment, production equipment, steam boilers, and air condition systems. These are all examples of ✅Boilers and machinery Spouses Ed and LeeAnn own a home. If Ed dies, LeeAnn will become the sole owner of the house. Both Ed and LeeAnn have an insurable interest in the property equal to the full value of the property. This is a ✅Tenancy by the entirety Self-insurance is particularly well -suited for financing losses that are ✅Paid out over a period of time With respect to self -insurance as a risk financing measure, ✅It is often used to cover workers compensation and other loss exposures that have claim payouts that extend over time When liability is assumed under a hold -harmless agreement, the indemnitor may be required to demonstrate proof of financial responsibility. What is often used to demonstrate this proof of financial responsibility? ✅Certificate of Insurance "Merchandise, raw materials and in -process or finished goods" is the Building and Personal Property Coverage Form's (BPP) definition for ✅Stock
