CPCU 500 - Foundations of Risk Management and Insurance UPDATED Exam Questions and CORRECT Answers
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Course
CPCU 500
Institution
CPCU 500
CPCU 500 - Foundations of Risk
Management and Insurance UPDATED
Exam Questions and CORRECT Answers
CHAPTER 1 - Correct Answer- ...
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...
CPCU 500 - Foundations of Risk
Management and Insurance UPDATED
Exam Questions and CORRECT Answers
CHAPTER 1 - Correct Answer- ...
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
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