CPCU 551 Questions and Answers
An example of an administrative expense that can minimize the cost of risk is - answer
Risk management consulting
The availability of funds to pay for losses is most important to organizations when -
answer Operations have been disrupted
A self-supporting solid wall that prevents a fire from passing through or around it is a -
answer Fire wall
A building with concrete exterior walls and wooden support beams as defined by
Insurance Services Office, Inc. (ISO) - answer 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? - answer The credibility of the data being used
In theory, liability losses are limited only by the - answer 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 - answer 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 - answer 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? - answer Managing the cost of risk
One way of jointly considering frequency and severity is to combine both frequency and
severity into - answer A total claims distribution
What type of captive typically operates as a formalized retention plan rather than a
transfer measure? - answer Single-parent captive
What is correct with respect to retention's ability to meet risk financing goals? - answer
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? - answer 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 - answer 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? - answer Large deductible plan
Many states require a self-insurer to - answer 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? - answer Autos
Perils are an important aspect of property insurance. What is correct with respect to
perils? - answer 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? - answer Business personal property
What is a characteristic of an organization that would be more appropriate for risk
transfer than risk retention? - answer 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 -
answer Managing uncertainty of loss outcomes
The best method of treating the loss exposure of flood when constructing a building is -
answer Locating in an area with no prior flood experience
A pool can meet the risk financing goal of minimizing the cost of risk through - answer
Economies of scale administration
What is true regarding the selection of appropriate risk financing measures? - answer
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 - answer
Auto accidents per mile driven
,What is correct with respect to retrospective rating plans? - answer 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? -
answer 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, - answer 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? - answer 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 -
answer 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? - answer
$55,000
A hazard is defined as - answer 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 -
answer Tenancy in common
Securing outside materials and maintaining roof tie-downs are risk control measures
particularly important for the peril of - answer Windstorm
One dimension of analyzing loss exposures is timing of losses. The timing of losses is
significant because - answer Money held in reserve to pay for a loss can earn
interest until the actual payment is made
A risk financing goal is - answer Managing uncertainty of loss outcomes
When analyzing loss exposures, total dollar losses can be determined by multiplying
loss frequency by - answer Loss severity
In loss analysis, the Prouty approach primarily involves - answer Loss frequency and
severity
, What is true regarding the risk financing goal of maintaining an appropriate level of
liquidity? - answer 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 - answer 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 - answer Pays any awarded insurance proceeds to Sam
Generally, funds used to pay for property losses are - answer 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 - answer 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 - answer 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 - answer Tenancy by the entirety
Self-insurance is particularly well-suited for financing losses that are - answer Paid
out over a period of time
With respect to self-insurance as a risk financing measure, - answer 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? - answer Certificate of Insurance
"Merchandise, raw materials and in-process or finished goods" is the Building and
Personal Property Coverage Form's (BPP) definition for - answer Stock
Under which provision of the Building and Personal Property Coverage Form (BPP) is
the maximum payment $10,000 or five percent of the building limit, whichever is less? -
answer Increased Cost of Construction additional coverage
