CPCU 500 - Foundations of Risk Management and Insurance || || || || || || || || ||
Exam with verified detailed solutions || || || ||
CHAPTER 1 || ||
What are the two elements of risk? - correct 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|| || || || || || || || || || ||
What is the difference between probability and possibility? - correct 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
|| || || || || ||
How does probability help an organizations risk management exposure? - correct
|| || || || || || || || || || ||
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
|| || || || || || || ||
How does classifying a risk help an organizations risk management process? - correct
|| || || || || || || || || || || || ||
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
|| || ||
-Compare pure risk with speculative risk || || || || ||
,-why is it important to distinguish between the 2 what making risk management
|| || || || || || || || || || || || ||
proceduces - correct 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*
|| || || || || || || || ||
- How does subjective and objective risk differ? - correct 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
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2. consequences over likelihood
|| || ||
3. Risk Awareness
|| ||
-Contracts diversifiable and nondiversifiable risk? - correct 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
|| || || || || || || || || || || ||
- Describe the quadrants of risk - correct 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*
|| || ||
What are the 3 components to constitute the financial consequence of risk faced by
|| || || || || || || || || || || || || ||
individuals or organizations? - correct answer✔✔- 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?
|| || || || || || || || || || || || || || ||
- correct 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 || ||
-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? - correct answer✔✔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
|| || || || || || || || || ||
Exam with verified detailed solutions || || || ||
CHAPTER 1 || ||
What are the two elements of risk? - correct 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|| || || || || || || || || || ||
What is the difference between probability and possibility? - correct 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
|| || || || || ||
How does probability help an organizations risk management exposure? - correct
|| || || || || || || || || || ||
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
|| || || || || || || ||
How does classifying a risk help an organizations risk management process? - correct
|| || || || || || || || || || || || ||
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
|| || ||
-Compare pure risk with speculative risk || || || || ||
,-why is it important to distinguish between the 2 what making risk management
|| || || || || || || || || || || || ||
proceduces - correct 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*
|| || || || || || || || ||
- How does subjective and objective risk differ? - correct 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
|| ||
-Contracts diversifiable and nondiversifiable risk? - correct 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
|| || || || || || || || || || || ||
- Describe the quadrants of risk - correct 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*
|| || ||
What are the 3 components to constitute the financial consequence of risk faced by
|| || || || || || || || || || || || || ||
individuals or organizations? - correct answer✔✔- 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?
|| || || || || || || || || || || || || || ||
- correct 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 || ||
-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? - correct answer✔✔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
|| || || || || || || || || ||
