CPCU 500 - Foundations of Risk Management and Insurance Exam 2023 Questions and Answers Complete
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Course
CPCU 500
Institution
CPCU 500
CPCU 500 - Foundations of Risk Management and Insurance Exam 2023 Questions and Answers Complete
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 d...
CPCU 500 - Foundations of Risk Management and
Insurance Exam 2023 Questions and Answers Complete
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
- cost of residual uncertainty
What are hidden costs that can affect an organization's calculation of expected
costs of loss?
-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?
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
- for organiz - includes effect that uncertainty has on consumer, investors, and suppliers
How does risk management practices differ between individuals and
organizations?
for individ - practice RM by buying insurance policies and contributing to savings plans
for smaller org - RM is not usually a dedicated function, usually carried out by senior
management
for large org - the RM is conducted as part of a formalized RM program
What is the difference in scope between traditional risk management and
enterprise-wide risk management?
-how does the focus of risk management differ between the 2?
scope of traditional risk - is on losses generated by pure, as opposed to speculative
risks
scope of enterprise-wide RM - encompasses all types of risks with the intent of
maximizing the org value
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