CPCU 500 – Flashcard
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For public entities such as cities, counties and public utilities, which one of the following is normally the most important post-loss risk management goal? Choose one answer. A. Growth B. Profitability C. Continuity of operations D. Earnings stability
answer
C. Continuity of operations
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Which one of the following is the goal of enterprise-wide risk management (ERM)? Choose one answer. A. Coordinate loss reduction efforts B. Reduce risk management costs C. Decentralize control of business decisions D. Maximize the organization's value
answer
D. Maximize the organization's value
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A risk management program must be monitored and periodically revised, and that revision involves four steps. Which one of the following is one of those four steps? Choose one answer. A. Establish results-based rather than activity-based standards of acceptable performance. B. Compare actual results with the established performance standards. C. Reduce any performance standards that have not been achieved by the actual results. D. Return to the first step in the risk management process to identify new loss exposures.
answer
B. Compare actual results with the established performance standards.
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Risk can be classified as subjective or objective. Which one of the following statements is correct with respect to these risk classifications? Choose one answer. A. Subjective risk is risk associated with individuals; objective risk is risk associated with objects or things. B. Risk managers focus on objective risk and attempt to avoid allowing subjective risk to affect their decisions. C. Subjective risk can exist even where objective risk does not. D. Individuals' subjective perception of risk in a given set of circumstances is typically much higher than the objective risk.
answer
C. Subjective risk can exist even where objective risk does not.
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JNL Construction is a general contractor. As the risk management professional for JNL, Marie should be aware of the company's contractual obligations, as well as the contractual obligations that others owe JNL. This knowledge is necessary for Marie to meet which one of the following pre-loss risk management goals? Choose one answer. A. Legality B. Social responsibility C. Tolerable uncertainty D. Continuity of operations
answer
A. Legality
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Residual uncertainty is the level of risk that remains after organizations implement their risk management plans. Which one of the following statements is correct with respect to residual uncertainty? Choose one answer. A. Residual uncertainty is an objective measure, independent of an organization's subjective view of the risks to which it is exposed. B. The cost of residual uncertainty is relatively easy to calculate and comprises an important part of any cost of risk study. C. Residual uncertainty can be minimized, but doing so is costly because more has to be spent on attempts to control or finance the risks involved. D. Cost of residual uncertainty is a factor only in the case of speculative risk; it is not a consideration where pure risk is concerned.
answer
C. Residual uncertainty can be minimized, but doing so is costly because more has to be spent on attempts to control or finance the risks involved.
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Tania has been unemployed for six months, and her unpaid bills are mounting. She recently damaged the front fender of her vehicle after running off the road. When seeking repairs to the vehicle, she convinced the auto body shop to include damages from previous incidents in the estimate. This would allow her to collect extra money from her insurer. From an insurance and risk management perspective, Tania's behavior is indicative of a Choose one answer. A. Legal hazard. B. Moral hazard. C. Morale hazard. D. Physical hazard.
answer
B. Moral hazard.
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Which one of the following describes how an effective risk management program should support an organization's pre-loss operational goals? Choose one answer. A. It should ensure that risk management costs are kept to a minimum. B. It should eliminate uncertainty by identifying and managing loss exposures. C. It should help ensure that the organization's legal obligations are satisfied. D. It should ensure that no conflicts exist among the pre-loss goals.
answer
C. It should help ensure that the organization's legal obligations are satisfied.
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Which one of the following statements is true regarding risk management techniques? Choose one answer. A. Data based on objective risk factors are usually the only criteria considered in determining appropriate risk management techniques. B. The risk management techniques selected by for-profit organizations should be both effective in meeting the organizations' goals and economical. C. In support of the goal of economy of operations, the risk management techniques selected by most for-profit organizations should be the least expensive ones. D. Nonfinancial considerations are usually disregarded in selecting risk management techniques because they cannot be factored into a cost/benefit analysis.
answer
B. The risk management techniques selected by for-profit organizations should be both effective in meeting the organizations' goals and economical.
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Which one of the following is an element of a loss exposure? Choose one answer. A. The verification of risk B. A cause of loss C. The probability of a loss D. The occurrence of a loss
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B. A cause of loss
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The statement "There is a 5 percent chance that John will be injured in an automobile accident while driving to work tomorrow." is an example of Choose one answer. A. Quantifying risk. B. Verifying risk. C. Quantifying loss exposures. D. Indentifying hazards.
answer
A. Quantifying risk.
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Dave owns a computer store. He stores backup media copies of confidential records off site in case there is a fire at the computer store. The risk control technique Dave is using to protect the confidential records is Choose one answer. A. Diversification. B. Duplication. C. Avoidance. D. Separation.
answer
B. Duplication.
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Which one of the following statements regarding monitoring the results of a risk management program is true? Choose one answer. A. A results standard focuses on the quality and quantity of the risk management activities undertaken by the organization. B. Risk management professionals generally prefer performance standards that are solely dependent on the organization's loss record. C. Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program. D. When performance substantially exceeds the standard, the risk management professional knows that the standard has been appropriately set.
answer
C. Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program.
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Delmond Manufacturing is opening a new manufacturing facility in a building that it purchased from a competitor. Using the information below, which one of the following represents the cost of risk of opening the new facility? New building cost $60.0 million Safety system upgrades $6.0 million Insurance premiums $1.5 million Retained losses $3.0 million Risk management department budget at the site $1.0 million Choose one answer. A. $7.0 million B. $10.0 million C. $11.5 million D. $71.5 million
answer
C. $11.5 million
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Achieving any post-loss goal involves expending risk management resources, which may conflict with the pre-loss goal of Choose one answer. A. Economy of operations. B. Earnings stability. C. Social responsibility. D. Tolerable uncertainty.
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A. Economy of operations.
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Another term for cause of loss is Choose one answer. A. Negative outcome. B. Exposure. C. Peril. D. Hazard.
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C. Peril
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Which one of the following financial consequences of loss can be established with a high degree of certainty fairly soon after the loss occurs? Choose one answer. A. The value of a pollution loss B. The value of a building that has been damaged by fire C. The value of business lost while the building damaged by fire is being restored D. The value of liability claims related to a defective product
answer
B. The value of a building that has been damaged by fire
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Which one of the following statements is correct with respect to the expected cost of losses or gains? Choose one answer. A. The expected cost of gains or losses includes only the direct costs associated with a particular risk. B. Calculating the expected cost of losses or gains for pure risks is more complex than for speculative risks. C. Industrial accidents can illustrate the various costs that need to be accounted for in determining cost of losses. D. The expected cost of losses is equal to the uninsured portion of any bodily injury or property damage.
answer
C. Industrial accidents can illustrate the various costs that need to be accounted for in determining cost of losses.
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An example of an intangible asset that an individual may possess is Choose one answer. A. An investment portfolio. B. A unique skill set. C. Money that is owed to them. D. A rental property.
answer
B. A unique skill set.
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During the past year, International Toys has undertaken four capital projects. The company has renovated and refurbished one of its aging warehouse buildings. It has purchased the most recent version of its current order processing computer software. It has added two trucks to its fleet of delivery vehicles. Lastly, it has purchased a new production machine that will allow it to launch a new product line. Which one of the following company projects is the most speculative risk? Choose one answer. A. The warehouse refurbishment B. The software upgrade C. The two new trucks D. The new production machine
answer
D. The new production machine
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Which one of the following is measurable and quantifies risk? Choose one answer. A. Uncertainty B. Possibility C. Probability D. Feasibility
answer
C. Probability
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One enterprise risk management (ERM) approach to categorizing risks involves dividing risks into four risk quadrants. The risks categorized as hazard risks are Choose one answer. A. Traditionally managed by risk management professionals. B. Speculative risks that fall outside the operational risk category. C. Traditionally handled by the treasury function. D. Fundamental to an organization's existence and business plans.
answer
A. Traditionally managed by risk management professionals.
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Question 23. Despite being frequently reminded otherwise, Laura was in the habit of leaving her car door unlocked, often with her purse inside. As a result, Laura's car was stolen, along with her purse. Laura's behavior is an example of a Choose one answer. A. Moral hazard. B. Morale hazard. C. Physical hazard. D. Legal hazard.
answer
B. Morale hazard.
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Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the Choose one answer. A. Cost of implementing and administering risk management. B. Cost of losses not reimbursed by insurance. C. Cost of residual uncertainty. D. Cost of measures to prevent or reduce the size of potential losses.
answer
C. Cost of residual uncertainty.
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Which one of the following best explains the term "residual uncertainty"? Choose one answer. A. It is the level of risk that remains after implementing risk management plans. B. It is the difference between estimated subjective risk and calculated objective risk. C. It is the amount invested in risk management in order to eliminate concern. D. It is uncertainty regarding the value of any residual salvage that would remain after a loss.
answer
A. It is the level of risk that remains after implementing risk management plans.
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While designing a display window, Adam, an employee of Mellfor Clothing Store, was injured when he fell from a ladder. Adam's accident was witnessed by several customers and employees. Adam suffered a broken leg and was unable to work for several weeks. Which one of the following represents a hidden cost to the clothing store resulting from Adam's accident? Choose one answer. A. Wages paid to Adam while he is unable to work B. Medical costs paid to Adam C. Time lost by employees who witnessed the accident D. Time lost by customers who witnessed the accident
answer
C. Time lost by employees who witnessed the accident
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The focus of risk quadrants is different from the focus of risk classifications in general. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on Choose one answer. A. Pure and speculative risks. B. Subjective and objective risks. C. The determination of whether the risk is diversifiable. D. The source of risk and who has traditionally managed it.
answer
D. The source of risk and who has traditionally managed it.
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Risk is a term that is regularly used and that is generally understood in context. As used in this discussion, which one of the following is one of the two elements within the definition of risk? Choose one answer. A. Uncertainty of outcome B. Likelihood of injury or damage to property C. Probability of financial loss D. Opportunity for profit
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A. Uncertainty of outcome
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Every loss exposure has which one of the following elements? Choose one answer. A. Property exposed to loss B. Possibility of direct loss C. Financial consequences of loss D. Tangible asset exposed to loss
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C. Financial consequences of loss
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Which one of the following statements is true regarding the effects of risk management on individuals, organizations, and society in general? Choose one answer. A. Organizations tend to exhibit a greater degree of risk aversion than do individuals. B. Risk management tends to increase the deterrence effect of risk in organizations. C. Risk management makes those who own or run an organization more willing to undertake risky activities. D. The benefits that risk management efforts provide to individuals and organizations are not felt by society in general.
answer
C. Risk management makes those who own or run an organization more willing to undertake risky activities.
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Which one of the following statements is true regarding probability distributions? Choose one answer. A. Cumulative probabilities can be used to evaluate the effect of various deductibles and policy limits on insured loss exposures. B. A probability distribution's median has a cumulative probability of 100. C. Cumulative probabilities are calculated by multiplying the probability of one event by the probability of a second event. D. The only way to determine the median in an array of loss data is to use the cumulative probability distribution.
answer
A. Cumulative probabilities can be used to evaluate the effect of various deductibles and policy limits on insured loss exposures.
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Which one of the following statements is correct with respect to continuous probability distributions? Choose one answer. A. They are typically used for loss frequency analysis rather than severity analysis. B. There is a finite number of possible outcomes in a continuous probability distribution. C. One way of presenting a continuous probability distribution is to divide the distribution into a countable number of bins. D. They are most effectively illustrated using tables and pie charts.
answer
C. One way of presenting a continuous probability distribution is to divide the distribution into a countable number of bins.
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It is important that historical losses be adjusted so that all loss data is expressed in a consistent basis. If a fire damaged a building in 2002 and it cost $200,000 to repair the building in 2002, then $200,000 represents the value of the loss in Choose one answer. A. Nominal dollars. B. Constant dollars. C. Current dollars. D. Real dollars.
answer
A. Nominal dollars.
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Probability analysis is particularly effective for projecting losses in organizations that have Choose one answer. A. Elected to estimate probabilities based on external data rather than their own. B. A limited amount of historical loss data from which to project changes in loss costs. C. Identified a relatively limited number of potential loss exposures. D. A substantial volume of data on past losses and fairly stable operations.
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D. A substantial volume of data on past losses and fairly stable operations.
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The weighted average of all the possible outcomes of a theoretical probability distribution is the Choose one answer. A. Expected value. B. Median. C. Mode. D. Dispersion.
answer
A. Expected value.
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Maria is a risk management professional trying to analyze workers compensation loss frequency by cause of loss. Which one of the following forms of probability distribution would be most appropriate for her to use? Choose one answer. A. Theoretical B. Discrete C. Cumulative D. Continuous
answer
B. Discrete
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Which one of the following statements is true regarding the use of checklists and questionnaires to identify loss exposures? Choose one answer. A. The completion of standardized checklists helps identify loss exposures and shows how those loss exposures support or affect specific organizational goals. B. The questions included in questionnaires and checklists developed by insurers relate mainly to loss exposures for which commercial insurance is generally available. C. Standardized risk assessment questionnaires can be used as the sole method to uncover an organization's loss exposures and reveal key information about those exposures. D. An advantage of risk assessment questionnaires is that they can be completed with relatively little expense, time, and effort.
answer
B. The questions included in questionnaires and checklists developed by insurers relate mainly to loss exposures for which commercial insurance is generally available.
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Claim adjuster Phyllis is reviewing fire losses. The dollar amounts of the losses are $2,000, $8,000, $10,000, $15,000, and $20,000. The median loss has an adjusted value of Choose one answer. A. $7,500. B. $10,000 C. $11.000 D. $27,500
answer
B. $10,000
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The outcomes in a continuous probability distribution are called probability Choose one answer. A. Severity distributions. B. Density functions. C. Distribution values. D. Data points. .
answer
B. Density functions.
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In Fred's large landscaping business, he knows that there is a point where equipment becomes unsafe and difficult to maintain. Fred realizes that after 2,000 miles of use, his costs for maintenance on his large mowers and sod busters dramatically rise. Using probability analysis Fred can better know Choose one answer. A. When to replace equipment. B. When to schedule routine maintenance. C. What type of equipment is needed for future projects. D. Which equipment is likely to cause bodily injury to operators or customers.
answer
A. When to replace equipment.
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Which one of the following statements regarding probability is correct? Choose one answer. A. The probability of an event that is absolutely certain is 0. B. Risk management professionals use theoretical probabilities because they are generally available for and applicable to claim analysis. C. Probabilities associated with events such as coin tosses can be developed from theoretical considerations and are unchanging. D. The accuracy of theoretical probabilities depends on the size and representative nature of the samples being studied.
answer
C. Probabilities associated with events such as coin tosses can be developed from theoretical considerations and are unchanging.
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Which one of the following refers to dollar values today and involves inflating historical values to reflect the effect of inflation? Choose one answer. A. Current dollars B. Nominal dollars C. Constant dollars D. Actual dollars
answer
A. Current dollars
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Which one of the following is correct with respect to compliance reviews? Choose one answer. A. Compliance reviews determine an organization's compliance with best practices of its industry. B. The benefit of compliance reviews is that they can help an organization minimize or avoid liability loss exposures. C. Compliance reviews are an inexpensive and easy way to identify loss exposures. D. Compliance reviews may be completed at regular intervals, with little or no ongoing monitoring.
answer
B. The benefit of compliance reviews is that they can help an organization minimize or avoid liability loss exposures.
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When developing loss severity distributions, insurance and risk management professionals should organize loss data by Choose one answer. A. Date of loss. B. Location of loss. C. Size of loss. D. Time of loss.
answer
C. Size of loss.
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If 95.44 percent of all outcomes are within two standard deviations above and below the mean and 2.15 percent of all outcomes are between two and three standard deviations above and 2.15 percent of all outcomes are between two and three standard below the mean, the percentage of all outcomes that lie outside three standard deviations above or below the mean is Choose one answer. A. .13 B. .26 C. 2.15 D. 4.30
answer
B. .26
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Investment income and interest earnings should be considered when analyzing which one of the following dimensions of loss exposures? Choose one answer. A. Loss frequency B. Timing C. Loss severity D. Total loss dollars
answer
B. Timing
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Which one of the following types of data organization is the foundation for developing loss severity distributions or loss trends over time? Choose one answer. A. Organizing losses by type of asset exposed B. Organizing losses by cause of loss C. Organizing losses by size D. Organizing losses historically by date
answer
C. Organizing losses by size
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When considering an empirical distribution, the measure of central tendency is called the mean. Which one of the following is correct with respect to the mean? Choose one answer. A. The mean is the value at the midpoint of a sequential data set with an odd number of values. B. The mean is the best estimate of expected outcomes because it is unaffected by changes in underlying conditions over time. C. The mean is the sum of the values in a data set divided by the number of values. D. An insurance or risk management professional will rarely use the mean to forecast future events.
answer
C. The mean is the sum of the values in a data set divided by the number of values.
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Insurance professionals may be able to use measures of dispersion around estimated losses to determine Choose one answer. A. The likelihood of specific types of losses. B. The standard deviation. C. What premium to charge for a particular coverage. D. Whether to offer insurance coverage to a potential insured.
answer
D. Whether to offer insurance coverage to a potential insured.
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Underwriter Carl is choosing between account A and account B which both have the same expected loss, but account B has more variation in its possible loss outcomes. Carl will most likely choose account Choose one answer. A. A because there is less risk involved in the loss exposure. B. A because the standard deviation is smaller. C. B because there is less risk involved in the loss exposure. D. B because the standard deviation is smaller.
answer
A. A because there is less risk involved in the loss exposure.
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There are several factors, both internal and external, that may influence data credibility for an organization. Which one of the following factors is an internal factor? Choose one answer. A. Organizational operations B. Natural catastrophes C. Large liability awards D. Terrorist attacks
answer
A. Organizational operations
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Which one of the following statements is true regarding the use of personal inspections to identify loss exposures? Choose one answer. A. All of an organization's loss exposures can be identified through personal inspection of critical sites within the organization. B. Personal inspections typically serve to confirm loss exposure identified in written descriptions of an organization's operations. C. A benefit of personal inspections is that they require no particular expertise and can be conducted by anyone within the organization. D. To be effective, personal inspections should be accompanied by discussions with front-line personnel who can identify nonobvious loss exposures.
answer
D. To be effective, personal inspections should be accompanied by discussions with front-line personnel who can identify nonobvious loss exposures.
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In addition to document analysis, insurance and risk management professionals may also conduct compliance reviews to identify loss exposures. Which one of the following is a benefit of conducting compliance reviews? Choose one answer. A. They are a practical means for identifying loss exposures. B. They can help minimize or avoid liability loss exposures. C. They require infrequent monitoring. D. They are inexpensive to conduct.
answer
B. They can help minimize or avoid liability loss exposures.
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Which one of the following is true regarding standard deviation? Choose one answer. A. It is the average value of predicted losses estimated from an empirical distribution. B. It indicates how widely dispersed the values in a distribution are. C. It can only be calculated when the probability of each outcome in a sample of data is known. D. It is the probability of each possible outcome in a sample of data.
answer
B. It indicates how widely dispersed the values in a distribution are.
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Which one of the following describes the law of large numbers? Choose one answer. A. It states that events that have occurred in the past under identical conditions and resulting from unchanging causal forces will increase at a predictable rate into the future. B. It states that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes also increases. C. It states that the more times a particular event has occurred in the past, the greater the likelihood of that same event occurring in the future. D. It states that, in order to be able to predict the relative probability of future events, those events must be both frequent, and independent of one another.
answer
B. It states that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes also increases.
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Which one of the following statements is true regarding typical shapes of symmetrical and skewed distributions? Choose one answer. A. In a symmetrical distribution, the mean and median have the same value. B. In a standard bell-shaped distribution, the mode has a greater value that either the mean or the median. C. Many loss distributions are skewed because the probability of large losses is large and the probability of small losses is small. D. If the distribution is skewed, the mean and median value will be the same as the mode value.
answer
A. In a symmetrical distribution, the mean and median have the same value.
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Which one of the following statements is true? Choose one answer. A. Probabilities deduced solely from historical data may change as new data are discovered or the environment changes. B. Theoretical probabilities are only estimates whose accuracy depends on the size and representative nature of the samples considered. C. Empirical probability distributions are constant as long as the physical conditions that generate them remain unchanged. D. The type of probability most commonly used by risk management professionals is theoretical probability.
answer
A. Probabilities deduced solely from historical data may change as new data are discovered or the environment changes.
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In an array of 10 losses, if expected loss frequency is 4.2 when expected loss severity is $200.50, the expected total dollar loss is Choose one answer. A. $86.10. B. $842.10. C. $861.00. D. $4,210.50.
answer
B. $842.10.
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The relationship between the expected value and the standard deviation of a normal distribution can have useful practical application. Which one of the following best describes such a practical application? Choose one answer. A. Predicting when losses, such as physical damages losses to an automobile fleet, are likely to occur B. Selecting which risk management technique that would be most appropriate for a particular loss exposure C. Determining a maintenance schedule for equipment that could become dangerous if it were to fail D. Identifying whether a particular loss exposure is high-frequency and low-severity, or high-severity and low frequency
answer
C. Determining a maintenance schedule for equipment that could become dangerous if it were to fail
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Daniel has developed a business continuity plan to address the threat of the loss of utility services at his company's large manufacturing plant. The management team has reviewed his plan and agrees that the plan can be quickly read and understood and should be effective in the event of a crisis. Daniel has provided copies of the plan to all relevant parties. Which one of the following should be Daniel's next step? Choose one answer. A. Locate a backup manufacturing site B. Develop a business recovery and restoration plan C. Perform a cash flow analysis D. Provide training and periodic rehearsals of the procedures
answer
D. Provide training and periodic rehearsals of the procedures
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Which one of the following statements is correct with respect to evaluating the efficiency of alternative risk control measures? Choose one answer. A. Given a loss exposure and alternative risk control measures, the risk management professional can determine which is most efficient by using cash flow analysis. B. The efficiency of various risk control measures is usually determined based on both quantitative and qualitative standards. C. An advantage of using cash flow analysis to evaluate the efficiency of alternative risk control measures is that it considers nonfinancial goals and selection criteria. D. A disadvantage of using cash flow analysis to evaluate the efficiency of alternative risk control measures is that the basis of comparison varies for each value-maximizing decision.
answer
A. Given a loss exposure and alternative risk control measures, the risk management professional can determine which is most efficient by using cash flow analysis.
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Business continuity is designed to meet both the primary risk management program post-loss goal of continuity of operation and the Choose one answer. A. Post-loss goal of growth. B. Post-loss goal of survival. C. Pre-loss goal of economy of operations. D. Pre-loss goal of social responsibility.
answer
B. Post-loss goal of survival.
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Which one of the following risk control techniques is more commonly applied to managing business risk rather than hazard risk? Choose one answer. A. Avoidance B. Separation C. Diversification D. Duplication
answer
C. Diversification
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Premises liability refers to liability created by Choose one answer. A. Having visitors to an organization's premises. B. State statutes to cover employees for work-related injuries on premises. C. Work completed on another organization's premises. D. Products manufactured on an organization's premises.
answer
A. Having visitors to an organization's premises.
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Which one of the following statements is correct with respect to property loss exposures? Choose one answer. A. Relatively few of the categories of risk control techniques can be applied to property loss exposures. B. The factors used to evaluate hazards and risks to real property from the external environment differ from those used to evaluate other risks to real property. C. Commercial property loss exposures are commonly examined based on construction, occupancy, protection, and environment. D. Risk control measures to reduce one property cause of loss, such as fire, are equally effective with other causes of loss.
answer
C. Commercial property loss exposures are commonly examined based on construction, occupancy, protection, and environment.
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A manufacturer that elects to discontinue a particular product due to potential liability loss exposures is practicing which one of the following risk control techniques? Choose one answer. A. Avoidance B. Loss prevention C. Loss reduction D. Separation
answer
A. Avoidance
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Restricting the number of key employees who can travel on the same aircraft is an example of which one of the following risk control techniques? Choose one answer. A. Loss reduction B. Duplication C. Separation D. Diversification
answer
C. Separation
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Many laws and regulations require organizations to implement specific risk control measures. Which one of the following statements is true in this regard? Choose one answer. A. These measures are a means of implementing the risk control techniques of separation, duplication, and diversification. B. The cost of adhering to these legal requirements becomes part of the cost of risk. C. These laws and regulations are amended infrequently and do not require ongoing monitoring. D. Failure to comply with legal requirements can expose an organization to sanction, but not to liability.
answer
B. The cost of adhering to these legal requirements becomes part of the cost of risk.
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Business continuity management was initially developed with a focus on Choose one answer. A. Ethical concerns. B. Information technology concerns. C. Terrorism concerns. D. Life safety concerns.
answer
B. Information technology concerns.
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Which one of the following best describes effective and efficient risk control measures? Choose one answer. A. They are those measures that increase employee satisfaction while reducing the level of risk. B. They reduce risk to a level that is acceptable to the organization's management. C. They are the least expensive measures that achieve an organization's risk management goals. D. They eliminate risk without requiring the organization to make outlays of cash.
answer
C. They are the least expensive measures that achieve an organization's risk management goals.
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Richley Auto is a chain of auto parts stores. It is experiencing a high frequency of auto accidents involving the delivery drivers, who are Richley employees. The management team has decided to require all drivers to attend a two day safety seminar offered by its franchiser. The safety seminar is an example of which one of the following risk control techniques? Choose one answer. A. Loss prevention B. Avoidance C. Separation D. Diversification
answer
A. Loss prevention
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Three risk control techniques can be used effectively to control liability losses. Which one of the following is included among those three techniques? Choose one answer. A. Separation B. Loss reduction C. Duplication D. Diversification
answer
B. Loss reduction
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Which one of the following risk control techniques is primarily used to reduce the frequency of losses, although it may also mitigate loss severity? Choose one answer. A. Separation B. Duplication C. Diversification D. Loss prevention
answer
D. Loss prevention
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Which one of the following focuses on the minimum building design, construction, operation, and maintenance requirements necessary to assure occupants of a safe exit from the burning portion of a building? Choose one answer. A. Building code B. Environmental security C. Workers compensation D. Life safety
answer
D. Life safety
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Which one of the following is correct with respect to a business continuity plan? Choose one answer. A. It details all of the risk control techniques that an organization has implemented in order to meet its risk management goals. B. It is designed to be used during a crisis, so it should be clear and able to be quickly read and understood. C. It is developed after the occurrence of an accidental loss and outlines how the organization will respond to similar future losses. D. It is typically a closely-guarded document, available only to an organization's senior management.
answer
B. It is designed to be used during a crisis, so it should be clear and able to be quickly read and understood.
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A manufacturer relies on supplies of a key raw material which it obtains from a particular supplier. The manufacturer makes arrangements with a second supplier to provide the raw material if the primary supplier is unable to do so. The manufacturer is practicing which one of the following risk control techniques? Choose one answer. A. Diversification B. Recovery planning C. Separation D. Duplication
answer
D. Duplication
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Business continuity management is primarily designed to meet which one of the following risk management goals? Choose one answer. A. Survival B. Tolerable uncertainty C. Social responsibility D. Growth
answer
A. Survival
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Which one of the following activities is the first step in the business continuity process? Choose one answer. A. Develop a business continuity plan. B. Develop a business continuity strategy. C. Evaluate the effect of risks on the organization's critical functions. D. Identify the organization's critical functions.
answer
D. Identify the organization's critical functions.
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Which one of the following statements is correct with respect to risk control measures for net income loss exposures? Choose one answer. A. Measures that control property, liability, or personnel loss exposures are ineffective in controlling net income loss exposures. B. Risk control measures focused on reducing the immediate effect of losses on net income will satisfy risk control needs for long-term impact. C. Two risk control measures that are directly aimed at reducing the severity of net income losses are separation and duplication. D. Diversification is not a viable risk control measure for controlling net income losses.
answer
C. Two risk control measures that are directly aimed at reducing the severity of net income losses are separation and duplication.
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Which one of the following planned retention funding measures is the least formal and the least expensive to administer? Choose one answer. A. Current expensing of losses B. Using an unfunded reserve C. Using a funded reserve D. Borrowing funds
answer
A. Current expensing of losses
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The level of cash flow variability that an organization is willing to accept Choose one answer. A. Is highest for organizations with low risk tolerance. B. Is typically quite easy to determine. C. Is impacted by the risk appetite of its stakeholders. D. Is independent of the organization's risk tolerance.
answer
C. Is impacted by the risk appetite of its stakeholders.
question
Which one of the following statements is correct with respect to transfer's ability to meet risk financing goals? Choose one answer. A. The primary benefit of transfer is certainty regarding the ability to pay losses. B. Transfer is less effective than retention in managing cash flow variability. C. Transfer increases the level of liquidity that an organization requires. D. The primary benefit of transfer is that it allows an organization to manage its cost of risk.
answer
A. The primary benefit of transfer is certainty regarding the ability to pay losses.
question
Which one of the following statements is correct with respect to risk transfer measures? Choose one answer. A. The majority of risk transfer measures are pure transfers. B. Risk transfers shift the transferor's legal responsibility for paying a loss to the transferee. C. Risk transfer measures tend to increase the variability of cash flow making an organization less attractive to investors. D. Most risk transfer measures limit the potential loss amounts being transferred.
answer
D. Most risk transfer measures limit the potential loss amounts being transferred.
question
The principal advantage of risk transfer measures is that they Choose one answer. A. Provide the organization with incentive for risk control. B. Allow the organization to maintain control of the claims process. C. Reduce exposure to large losses. D. Provide ancillary services.
answer
C. Reduce exposure to large losses.
question
Catastrophe bonds are used to Choose one answer. A. Hedge the price of commodities. B. Retain the risk of catastrophe losses. C. Raise cash at prearranged terms after a loss occurs. D. Securitize insurance risk through a marketable security.
answer
D. Securitize insurance risk through a marketable security.
question
Which one of the following planned retention funding measures recognizes in advance the potential for loss, and supports that potential by allocating cash, securities, or other liquid assets to meet obligations? Choose one answer. A. Current expensing of losses B. An unfunded reserve C. A funded reserve D. Borrowed funds
answer
C. A funded reserve
question
An advantage that retention offers an individual or organization is Choose one answer. A. Incentive for risk control. B. Reduction in exposure to large loss. C. Reduction in cash flow variability. D. Transference of responsibility for claims administration.
answer
A. Incentive for risk control.
question
Which one of the following statements is correct with respect to self-insurance? Choose one answer. A. It is an informal retention plan in which an organization pays losses using cash flows or current liquid assets with no method of recording losses. B. It is often used to cover workers' compensation and other loss exposures that have claim payments that extend over time. C. Cost of risk with self-insurance is typically higher than with other risk financing measures. D. It is usually used for low-frequency loss exposures.
answer
B. It is often used to cover workers' compensation and other loss exposures that have claim payments that extend over time.
question
Which one of the following statements is correct with respect to retention's ability to meet risk financing goals? Choose one answer. A. Retention exposes an organization to less variability in cash flows than transfer. B. Retention enables an organization to manage its cost of risk. C. Retention is the most effective way to meet the risk financing goal of paying losses. D. Retention generally reduces the level of liquidity needed.
answer
B. Retention enables an organization to manage its cost of risk.
question
Which one of the following is the most important reason that the transferor in a risk transfer agreement assess the financial strength of the transferee? Choose one answer. A. Most risk transfer measures involve some type of limitation on the potential loss amount being transferred. B. There are often disputes about whether a loss falls within the transfer agreement's scope. C. Risk transfer measures are usually a combination of retention and transfer. D. The ultimate responsibility for paying for loss remains with the transferor in a risk transfer agreement.
answer
D. The ultimate responsibility for paying for loss remains with the transferor in a risk transfer agreement.
question
Which one of the following statements is true? Choose one answer. A. Real property and machinery are examples of liquid assets. B. As an organization's retention level increases, so does the level of liquidity required. C. Liquid assets offer higher returns than other, longer-term investments. D. Liquidity can be increased by using cash flow to fund capital projects.
answer
B. As an organization's retention level increases, so does the level of liquidity required.
question
Insurance products are often designed around which one of the following types of loss exposures? Choose one answer. A. Low-frequency, low-severity B. Low-frequency, high-severity C. High-frequency, low-severity D. High-frequency, high-severity
answer
B. Low-frequency, high-severity
question
Which one of the following statements is correct with respect to an organization's risk financing goals? Choose one answer. A. Managing the cost of risk means minimizing administrative, risk control, and risk financing expenses in an attempt to increase profits. B. The acceptable cash flow variability level for an organization depends on factors such as its size and financial strength. C. For most organizations, borrowing is the only available method of increasing liquidity to pay for retained losses. D. The level of cash flow variability that an organization is willing to accept is highest for organizations that prefer to avoid risk.
answer
B. The acceptable cash flow variability level for an organization depends on factors such as its size and financial strength.
question
Which one of the following is correct regarding captive programs? Choose one answer. A. A captive collects premium, issues policies, purchases reinsurance, invests assets and pays losses, just like any other insurer. B. Under a rent-a-captive arrangement, no risk transfer occurs among the members, and the capital rented by one insured cannot be diminished by the losses of another insured in the structure. C. Risk retention groups were originally formed in direct response to the lack of workers compensation coverage available in insurance markets. D. In a protected cell company, each organization keeps its own premium and loss account, but a member may access the assets of another member in the event the member becomes insolvent.
answer
A. A captive collects premium, issues policies, purchases reinsurance, invests assets and pays losses, just like any other insurer.
question
Which one of the following rating plans adjusts the premium for the current policy period to recognize the insured's actual losses during the current policy period? Choose one answer. A. Experience rating plan B. Guaranteed cost plan C. Retrospective rating plan D. Schedule rating plan
answer
C. Retrospective rating plan
question
Which one of the following statements is true? Choose one answer. A. It is typically more economical for an organization to retain rather than transfer loss exposures directly related to its core operations. B. Diversifying loss exposures tends to reduce the accuracy of loss estimates, and increases the uncertainty regarding future losses. C. An organization that undertakes extensive risk control measures is less likely to have the ability to fund retention of its loss exposures. D. The higher an organization's willingness to accept risk, the higher the likelihood that transfer will be used to cover its loss exposures.
answer
A. It is typically more economical for an organization to retain rather than transfer loss exposures directly related to its core operations.
question
Captive insurers are Choose one answer. A. Prohibited from underwriting loss exposures not directly related to the captive's parent or affiliates. B. Typically domiciled in the same jurisdiction as the parent company. C. Used to insure property loss exposures that are difficult to insure in the primary market. D. Not permitted to transfer the financial consequences of insured loss exposures to other insurers.
answer
C. Used to insure property loss exposures that are difficult to insure in the primary market.
question
Which one of the following is considered the primary advantage of using retention as a risk financing technique? Choose one answer. A. Cost savings B. Control of claims process C. Timing of cash flows D. Incentives for risk control
answer
A. Cost savings
question
Which one of the following planned retention measures is appropriate for funding losses with a low expected value, but becomes less advisable as the expected value of losses gets larger? Choose one answer. A. Using a funded reserve B. Current expensing of losses C. Using an unfunded reserve D. Borrowing funds
answer
B. Current expensing of losses
question
Which one of the following is not compulsary unless contractually required by a client or customer? Choose one answer. A. Solvency II B. ISO 31000:2009 C. Sarbanes-Oxley Act of 2002 D. Basel II
answer
B. ISO 31000:2009
question
Halbinger Insurance Company (HIC) is a regional provider of homeowners insurance products. The management team at HIC has identified the risk that a competitor could emerge in the market offering a similar product at reduced rates. To deal with this threat, the team has developed plans to launch a marketing campaign that would highlight the superior coverage and service features that the HIC product offers in the event that the competitor does emerge. The technique HIC is using to treat this risk to strategy falls into which one of the following categories? Choose one answer. A. Avoid B. Mitigate C. Transfer D. Accept
answer
B. Mitigate
question
Which one of the following entities consists of national risk management associations, individual risk managers from Central European countries, and representatives from health organizations, educational sectors and public sectors? Choose one answer. A. The Federation of European Risk Management Associations (FERMA) B. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) C. The Basel Committee on Banking Supervision D. The British Standards Institution (BSI)
answer
A. The Federation of European Risk Management Associations (FERMA)
question
The chief risk officer helps the enterprise create a risk culture in which individual department heads and project managers are identified as Choose one answer. A. Strategists. B. Coaches. C. Risk owners. D. Stakeholders.
answer
C. Risk owners.
question
Insurer A introduced a new insurance product into the market that results in attracting youthful drivers. As a result of teen drivers purchasing Insurer A's policies, the insurer outperformed its strategic goals. This is an example of Choose one answer. A. Pure risk. B. Upside risk. C. Market fluctuation risk. D. Traditional risk.
answer
B. Upside risk.
question
One of the differences between traditional risk management (RM) and enterprise-wide risk management (ERM) is in the organizational structure. The chief risk officer in an ERM structure typically reports to the Choose one answer. A. Finance department. B. Chief executive officer (CEO). C. Operations manager. D. Legal department.
answer
B. Chief executive officer (CEO).
question
An organization that has adopted an ERM approach monitors risks, threats, and opportunities that arise from a variety of sources. The two important benefits provided by this approach verses traditional risk management are improved risk communication and Choose one answer. A. Centralization of risk ownership. B. Increased focus on transfer of risk. C. Enhanced decision making. D. Increased focus on avoidance of risk.
answer
C. Enhanced decision making.
question
Traditional risk management is concerned with Choose one answer. A. Financial risk. B. Strategic risk. C. Speculative risk. D. Pure risk.
answer
D. Pure risk.
question
Enterprise-wide risk management (ERM) will generally result in which one of the following? Choose one answer. A. Management by consensus B. Hierarchal management C. Top-down decision making D. Bottom-up decision making
answer
A. Management by consensus
question
ERM optimizes risk taking in relation to strategic goals. ERM also considers the risk that the organization will outperform its strategic goals, which is referred to as Choose one answer. A. Pure risk. B. Upside risk. C. Situational risk. D. Resultant risk.
answer
B. Upside risk.
question
Enterprise-wide risk management (ERM) considers the global array of risks that affect an organization, which can be represented by a three-dimensional depiction of attributes. These attributes are resources, events, and Choose one answer. A. Metrics. B. Impacts. C. Strategies. D. Hazards.
answer
B. Impacts.
question
Risk professional Alex has assigned a high likelihood to the risk that a competitor will cut prices in the market in which his organization operates. In analyzing this potential risk, Alex decides that if this threat materializes, his organization's strategy will be to launch a marketing campaign that emphasizes his firm's superior product features. This is an example of which one of the following techniques for treating risks to strategy? Choose one answer. A. Avoid B. Transfer C. Mitigate D. Optimize/exploit
answer
C. Mitigate
question
Which one of the following is correct regarding traditional risk management (RM) verses Enterprise-wide risk management (ERM)? Choose one answer. A. The RM approach establishes a method to gather information organization-wide and develop a framework for analyzing and communicating that information. B. An ERM approach monitors systemic risks inherent in the organization that can adversely affect its quarterly profits and losses. C. The RM approach allows an organization to systematically explore new opportunities for econonmic efficiencies while managing internal and external threats. D. A strong ERM program encourages the buy-in of an organization's stakeholders by establishing management strategies that protect the organization's reputation and assets.
answer
D. A strong ERM program encourages the buy-in of an organization's stakeholders by establishing management strategies that protect the organization's reputation and assets.
question
Which one of the following provides an effective mechanism for initiating dialogue with an organization's board and senior executives about establishing enterprise-wide risk management (ERM) goals as part of the strategic management process? Choose one answer. A. COSO II B. Basel II C. ISO 31000:2009 D. Solvency II
answer
A. COSO II
question
While identifying risks to strategy using the enterprise-wide risk management process, an organization might ask the question, "What if an event occurs that decreases the product yield for one of our major competitors"? Assuming the likelihood of the event is high, which one of the following techniques for treating risks to strategy would be the most appropriate to treat this risk? Choose one answer. A. Avoid B. Optimize C. Mitigate D. Transfer
answer
B. Optimize
question
Sarah is a risk professional involved in her organization's enterprise-wide risk management (ERM) program. She is currently involved in a study to determine the impact on consumer demand resulting from the organization's effect on the environment. Sarah is involved in which one of the following steps of the ERM process? Choose one answer. A. Develop ERM goals B. Determine whether it is necessary to communicate with external stakeholders C. Analyze, evaluate, and prioritize critical risks D. Treat critical risks, considering priority
answer
C. Analyze, evaluate, and prioritize critical risks
question
The enterprise risk manager, who is often called a chief risk officer, typically reports to the organization's Choose one answer. A. Legal department. B. Finance department. C. Chief executive officer (CEO). D. Safety manager.
answer
C. Chief executive officer (CEO).
question
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) published what is referred to as COSO II. COSO II, a risk management framework, Choose one answer. A. Is intended for smaller organizations that do not have a board of directors. B. Delves into the details of risk management approaches and processes. C. Focuses on threats to the organization and application of controls. D. Creates specific enterprise-wide risk management (ERM) strategies and treatment techniques.
answer
C. Focuses on threats to the organization and application of controls.
question
Sub-frameworks exist that are not considered to be enterprise-wide risk management (ERM) frameworks, but that provide specific industries and sectors with guidance. Which one of the following is an example of one of these sub-frameworks? Choose one answer. A. Application of Risk Management to Medical Procedures B. Nuclear Industry- Offshore Production Installations C. Space Systems Risk Management D. Social Security and Human Services Series
answer
C. Space Systems Risk Management
question
The first step in integrating enterprise-wide risk management (ERM) with strategic planning is to Choose one answer. A. Consider goals for ERM as part of the organization's business model. B. Identify threats to achieving organizational goals. C. Determine the criticality of the risks to the organization in order to prioritize risks for treatment. D. Direct an examination of internal and external threats to the organization's mission, strategies, and goals.
answer
A. Consider goals for ERM as part of the organization's business model.
question
When a loss at one loss exposure has no effect on the probability of a loss at another loss exposure, those exposures are said to be Choose one answer. A. Correlated. B. Unique. C. Separate. D. Independent.
answer
D. Independent.
question
As a single mother on a very tight budget, Ciara is tempted to skimp on her insurance. However, her friend Mehmet tells her not to skimp on insurance, because it will help manage her cash flows. Which one of the following examples best illustrates Mehmet's point? Choose one answer. A. Ciara finds it difficult to come up with a $787 auto insurance premium every six months. B. Ciara needs her car to get to her job, and she needs her job to make car payments and pay for her car insurance. C. When her car's transmission goes out a month after the warranty expires, Ciara is faced with an $1,100 repair bill. D. When her car's windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it.
answer
D. When her car's windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it.
question
Which one of the following types of loss exposures meets all of the characteristics of ideally insurable personal loss exposures? Choose one answer. A. Property windstorm B. Net income C. Automobile liability D. Health
answer
C. Automobile liability
question
Which one of the following statements is correct with respect to personal net income loss exposures? Choose one answer. A. Net income losses for individuals result from a reduction in salary rather than an increase in expenses. B. Net income losses caused by the economic environment meet the characteristics of ideally insurable loss exposures. C. Net income losses resulting from unemployment may or may not be fortuitous, depending on the individual involved. D. Net income losses are typically not independent and can be catastrophic from the perspective of the insurer.
answer
C. Net income losses resulting from unemployment may or may not be fortuitous, depending on the individual involved.
question
Which one of the following types of personal loss exposures is not usually fortuitous? Choose one answer. A. Liability loss exposures B. Life loss exposures C. Health loss exposures D. Retirement loss exposures
answer
D. Retirement loss exposures
question
The state of Maryland operates a residual market plan (the Maryland Auto Insurance Fund—MAIF) that provides coverage for drivers who are unable to obtain coverage from private insurers. Which one of the following is the best rationale for the MAIF program? Choose one answer. A. Auto insurance for high-risk drivers is profitable, and the program enables the state to share in the profits. B. Auto insurance is compulsory, and the program makes it possible for all drivers to have reasonably priced insurance. C. Private insurers face limited competition, and the state increases competitive pressures by operating this type of plan. D. Private insurers overcharge for auto insurance, and the state provides a low-cost alternative.
answer
B. Auto insurance is compulsory, and the program makes it possible for all drivers to have reasonably priced insurance.
question
Of all the characteristics of an ideally insurable loss exposure, probably the most important is that Choose one answer. A. The insurer is able to charge a premium that the insured can afford to pay. B. That the losses associated with it typically involve small amounts. C. That the insurer can charge a high premium for the coverage. D. The insurer is able to predict the amount and timing of each future loss.
answer
A. The insurer is able to charge a premium that the insured can afford to pay.
question
Which one of the following statements is correct regarding net income loss exposures? Choose one answer. A. Net income losses caused by the business environment represent pure risk. B. Net income losses resulting from liability losses are measurable because the timing and duration of the loss are definite. C. Net income losses resulting from liability losses are insured by a variety of business income coverages. D. Net income loss exposures associated with property losses exhibit almost all the characteristics of ideally insurable risks.
answer
D. Net income loss exposures associated with property losses exhibit almost all the characteristics of ideally insurable risks.
question
Which one of the following statements is correct with respect to personnel losses arising from the death cause of loss? Choose one answer. A. The existence of life insurance means that death involves speculative risk. B. Because everyone will ultimately die, death is not considered to be fortuitous. C. Unless a disaster occurs, death losses are typically independent and not catastrophic. D. The economic loss due to the death of a key employee is generally quite easily measured.
answer
C. Unless a disaster occurs, death losses are typically independent and not catastrophic.
question
Julio and Emily are both equally good drivers with clean records, and they drive similar cars. When they marry, Emily adds Julio to her personal auto policy and cancels his old policy. Now that Julio has been added to Emily's policy, the potential loss severity of an accident involving Emily's car is Choose one answer. A. Correlated. B. Decreased. C. Increased. D. Unchanged.
answer
D. Unchanged.
question
Which one of the following statements concerning government insurance programs is true? Choose one answer. A. Businesses seeking flood insurance under the National Flood Insurance Program (NFIP) must purchase it at local federal government offices. B. Various state insurance programs provide crop insurance for perils such as drought, disease, excessive rain and hail. C. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can't get it otherwise. D. The federal government provides workers compensation insurance to employers who cannot get it from private insurers.
answer
C. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can't get it otherwise.
question
Which one of the following statements is correct? Choose one answer. A. Contractors must usually provide evidence of liability insurance before a construction contract is granted. B. Insurers generally do not provide incentives to organizations to implement risk control measures. C. Insurance policies typically cannot be used to provide evidence of financial resources. D. One disadvantage of insurance is that it promotes inefficient use of policyholders' funds.
answer
A. Contractors must usually provide evidence of liability insurance before a construction contract is granted.
question
Which one of the following statements is correct with respect to residential property loss exposures? Choose one answer. A. Arson-for-profit losses are usually catastrophic. B. Losses caused by flood are usually neither definite nor measurable. C. Windstorm premiums are economically feasible anywhere in the continental U.S. D. Fire, windstorm, and flood involve a large number of similar exposure units.
answer
D. Fire, windstorm, and flood involve a large number of similar exposure units.
question
State governments can be involved in insurance at various levels. Some states provide which one of the following types of insurance in competition with private insurers? Choose one answer. A. Crop B. Flood C. General liability D. Workers compensation
answer
D. Workers compensation
question
Which one of the following statements is correct with respect to the characteristics of premises and operations liability loss exposures? Choose one answer. A. Because organizations profit from their operations, premises and operations liability loss exposures involve speculative risk. B. Premises and operations liability losses typically arise from an insured's negligence, so they cannot be considered to be fortuitous. C. Given the large number of retail stores in the U.S., the premises and operations liability loss exposure is potentially catastrophic. D. Premises and operations liability losses are definite in time, cause, and location, and are measurable.
answer
D. Premises and operations liability losses are definite in time, cause, and location, and are measurable.
question
Insurance deals primarily with loss exposures that are fortuitous. Which one of the following statements best characterizes fortuitous losses? Choose one answer. A. Fortuitous losses are beyond the insured's control. B. Fortuitous loss exposures are expected. C. Fortuitous loss exposures are generally predictable. D. Fortuitous losses are intentional.
answer
A. Fortuitous losses are beyond the insured's control.
question
Which one of the following statements is correct? Choose one answer. A. Insurers are prohibited from investing in social projects. B. Insurance provides a source of investment funds for insurers but not for policyholders. C. Insurers cannot invest premium income because it must be available to pay claims. D. Insurers' investment income helps keep premiums at a reasonable level.
answer
D. Insurers' investment income helps keep premiums at a reasonable level.
question
Which one of the following statements is correct? Choose one answer. A. If an insurer cannot provide the insurance product at a reasonable premium, there will be no demand. B. Loss exposures involving only small losses are generally considered to be insurable. C. Generally, the characteristics of ideally insurable loss exposures are unrelated to the premium that must be charged. D. The expense of providing insurance decreases with the frequency of claims because of economies of scale.
answer
A. If an insurer cannot provide the insurance product at a reasonable premium, there will be no demand.
question
Which one of the following statements is correct regarding the benefits that insurance provides? Choose one answer. A. The premiums collected by insurers must be held in cash to be available to pay claims. B. Insurance provides a source of investment funds for insurers, but not for insureds. C. Insurers are prohibited from investing in such things as research or technological advancements. D. Investment income helps keep insurance premiums at a reasonable level.
answer
D. Investment income helps keep insurance premiums at a reasonable level.
question
Which one of the following statements is correct with respect to the fire cause of loss in commercial property insurance? Choose one answer. A. Pinpointing the time at which a fire began is usually difficult and loss timing is critical. B. Knowing the value of a building or its contents is critical in measuring the amount of a fire loss. C. An insurer can do little to ensure that fire loss exposures are independent and not catastrophic. D. Because fires are high-severity events, this cause of loss is generally expensive to insure.
answer
B. Knowing the value of a building or its contents is critical in measuring the amount of a fire loss.
question
Which one of the following statements is correct with respect to characteristics of insurable loss exposures? Choose one answer. A. If the insured has control over whether or when a loss will occur, the risk is attractive to insure. B. If losses are not fortuitous, the insurer cannot calculate an appropriate premium. C. If a loss is fortuitous, the chance of loss could increase as soon as a policy is issued. D. Private insurance is suitable for risks where the probability and timing of loss is known.
answer
B. If losses are not fortuitous, the insurer cannot calculate an appropriate premium.
question
Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to drive it to special events at schools around the country where it will serve as a mobile billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to insure his vehicle because it fails to meet one of the ideal characteristics of an insurable risk. Which characteristic is Oscar's vehicle least likely to meet? Choose one answer. A. Definite and measurable B. Independent and not catastrophic C. Large number of similar exposure units D. Pure risk
answer
C. Large number of similar exposure units
question
Life, health, and retirement causes of loss are Choose one answer. A. Examples of speculative risks. B. Insurable through private insurers. C. Typically not definite or measurable. D. Subject to moral and morale hazard problems.
answer
D. Subject to moral and morale hazard problems.
question
Which one of the following statements is correct with regard to the concept of pooling? Choose one answer. A. Pooling arrangements combine the loss exposures and financial resources of pool members for the purpose of sharing losses. B. Pooling arrangements reduce the most risk when the loss exposures being pooled are correlated. C. As the size of a pool increases, the expected losses to each pool member become less predictable. D. Generally, a loss to one member of a pooling arrangement increases the chance of a loss to another member.
answer
A. Pooling arrangements combine the loss exposures and financial resources of pool members for the purpose of sharing losses.
question
Pooling arrangements reduce the most risk to the group when Choose one answer. A. The loss exposures being pooled are independent of one another. B. The size of the pool is limited. C. The loss exposures in the pool are geographically concentrated. D. The risk of loss for pool members is perfectly positively correlated.
answer
A. The loss exposures being pooled are independent of one another.
question
Which one of the following is a federal insurance plan in which the government acts as a partner with a private insurer that sells insurance and pays the claims, and then reimburses the insurer for the portion of losses that exceeds premiums and investment income? Choose one answer. A. Beach and Windstorm Plan B. National Flood Insurance Program (NFIP) C. Terrorism Risk Insurance Program (TRIP) D. Residual Auto Plan
answer
B. National Flood Insurance Program (NFIP)
question
Two individuals each have a 75 percent probability of not suffering a homeowners loss in a given year. Assuming that losses involving these two homes are independent of one another, and that the two individuals enter into a pooling arrangement, which one of the following represents the probability of neither individual suffering a loss? Choose one answer. A. .00 B. .56 C. .75 D. 1.5
answer
B. .56
question
The primary role of insurance is to Choose one answer. A. Make a profit for the insurance company's shareholders. B. Educate individuals and organizations about loss prevention. C. Indemnify individuals and organizations for covered losses. D. Sell insurance policies to individuals and organizations.
answer
C. Indemnify individuals and organizations for covered losses.
question
Delmond Corporation wishes to purchase key person life insurance to provide a financial cushion against the loss of its chief executive officer (CEO). This exposure may fail to meet which one of the following characteristics of an ideally insurable risk? Choose one answer. A. Definite in location B. Definite in time C. Measurable D. Pure risk
answer
C. Measurable
question
Which one of the following correctly describes a reason for government involvement in property-casualty insurance? Choose one answer. A. Selling insurance provides the government with a non-tax source of revenues and profits. B. Government programs can meet legitimate public demands unmet by private insurers. C. Competition from government plans keeps private insurer's premiums competitive. D. Preventing high-risk individuals or activities from being insured is in the public interest.
answer
B. Government programs can meet legitimate public demands unmet by private insurers.
