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CPCU 551 Questions and Correct Answers
An example of an administrative expense that can minimize the
cost of risk is Ans: Risk management consulting
The availability of funds to pay for losses is most important to
organizations when Ans: Operations have been disrupted
A self-supporting solid wall that prevents a fire from passing
through or around it is a Ans: Fire wall
A building with concrete exterior walls and wooden support beams
as defined by Insurance Services Office, Inc. (ISO) Ans: 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? Ans: The credibility of the data being used
In theory, liability losses are limited only by the Ans: 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
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, 2 | Page
restoration specialist Peter to attempt to remove it. The bailor in
this scenario is Ans: 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 Ans: 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? Ans: Managing the cost of risk
One way of jointly considering frequency and severity is to
combine both frequency and severity into Ans: A total claims
distribution
What type of captive typically operates as a formalized retention
plan rather than a transfer measure? Ans: Single-parent captive
What is correct with respect to retention's ability to meet risk
financing goals? Ans: 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
© 2025 All rights reserved
, 3 | Page
petty cash and exits the building through the same window. This is
an example of what type of theft? Ans: 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 Ans:
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?
Ans: Large deductible plan
Many states require a self-insurer to Ans: 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? Ans: Autos
Perils are an important aspect of property insurance. What is
correct with respect to perils? Ans: 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
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generally used in property insurance policies to refer to all these
types of property? Ans: Business personal property
What is a characteristic of an organization that would be more
appropriate for risk transfer than risk retention? Ans: 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 Ans: Managing uncertainty
of loss outcomes
The best method of treating the loss exposure of flood when
constructing a building is Ans: Locating in an area with no prior
flood experience
A pool can meet the risk financing goal of minimizing the cost of
risk through Ans: Economies of scale administration
What is true regarding the selection of appropriate risk financing
measures? Ans: 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 Ans: Auto accidents per mile driven
© 2025 All rights reserved
CPCU 551 Questions and Correct Answers
An example of an administrative expense that can minimize the
cost of risk is Ans: Risk management consulting
The availability of funds to pay for losses is most important to
organizations when Ans: Operations have been disrupted
A self-supporting solid wall that prevents a fire from passing
through or around it is a Ans: Fire wall
A building with concrete exterior walls and wooden support beams
as defined by Insurance Services Office, Inc. (ISO) Ans: 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? Ans: The credibility of the data being used
In theory, liability losses are limited only by the Ans: 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
© 2025 All rights reserved
, 2 | Page
restoration specialist Peter to attempt to remove it. The bailor in
this scenario is Ans: 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 Ans: 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? Ans: Managing the cost of risk
One way of jointly considering frequency and severity is to
combine both frequency and severity into Ans: A total claims
distribution
What type of captive typically operates as a formalized retention
plan rather than a transfer measure? Ans: Single-parent captive
What is correct with respect to retention's ability to meet risk
financing goals? Ans: 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
© 2025 All rights reserved
, 3 | Page
petty cash and exits the building through the same window. This is
an example of what type of theft? Ans: 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 Ans:
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?
Ans: Large deductible plan
Many states require a self-insurer to Ans: 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? Ans: Autos
Perils are an important aspect of property insurance. What is
correct with respect to perils? Ans: 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
© 2025 All rights reserved
, 4 | Page
generally used in property insurance policies to refer to all these
types of property? Ans: Business personal property
What is a characteristic of an organization that would be more
appropriate for risk transfer than risk retention? Ans: 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 Ans: Managing uncertainty
of loss outcomes
The best method of treating the loss exposure of flood when
constructing a building is Ans: Locating in an area with no prior
flood experience
A pool can meet the risk financing goal of minimizing the cost of
risk through Ans: Economies of scale administration
What is true regarding the selection of appropriate risk financing
measures? Ans: 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 Ans: Auto accidents per mile driven
© 2025 All rights reserved
