CPCU - Quiz/Test Prep.
D. Mechanical sensors.
A municipal water plant installed water flow sensors and water pressure sensors on the water pipes leaving the plant. The sensors make sure water is flowing properly and that there are no leaks or clogs which could produce a loss. These types of sensors are Select one: A. Biochemical sensors. B. Thermal sensors. C. Radiant sensors. D. Mechanical sensors.
B. Construction, occupancy, protection, and external exposures
A risk manager and safety engineer need to consider which one of the following interdependent elements when evaluating the premises condition? Select one: A. Air quality and movement B. Construction, occupancy, protection, and external exposures C. Temperature extremes D. Ergonomic stress
A process in which managers perform an annual self-audit of the level of confidence they have in the risk management culture, practice, and procedures in their area is called Select one: A. A control risk self-assessment.Correct. B. A risk management review. C. A reunderwriting process. D. An underwriting audit.
A. A control risk self-assessment.Correct.
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? Select one: A. Discrete B. Cumulative C. Continuous D. Theoretical
A. Discrete
George is a delivery driver for Fantastic Furniture, a large store. While on his way to make a delivery, George ran over a piece of lumber with some nails it. The nails punctured a tire, and George ran off the road and hit a vehicle. The police investigated the accident and took a statement from George and from an eye-witness. In his statement, George admitted that he was talking on his cell phone when he ran over the piece of lumber. The eye-witness estimated George was driving 45 miles-per-hour in a 35 miles-per-hour speed zone. If Fantastic Furniture performs a root cause analysis (RCA) of this accident, which of the following would be identified as a root cause? Select one: A. Inadequate driver training B. Tire punctured by nails in piece of lumber C. Driver distracted by cell phone use D. Vehicle driven at excessive speed
A. Inadequate driver training
Geneva Trucking installed telematics devices in all of its trucks. The sensors in two trucks indicate a frequency of hard braking. Which one of the following types of indicator does this information provide for Geneva Trucking? Select one: A. Leading indicator B. Generic indicator C. Control indicator D. Lagging indicator
A. Leading indicator
The broad form of the hold-harmless agreement attempts to A. Place all financial consequences of potential losses on the transferee. B. Place all responsibility for negligent acts on the transferor. C. Eliminate the possibility of negligence on the part of the transferee. D. Transfer all financial consequences of potential losses to the transferor.
A. Place all financial consequences of potential losses on the transferee.
George has received an inheritance and is deciding what to do with the money. He has limited his options to four choices: donate all the money to his favorite charity, use the entire inheritance to buy a yacht, invest the inheritance in a small rental property, or use the entire amount to purchase T-bills. Which one of the following statements is true regarding the risk involved in George's options? Select one: A. The rental property presents both pure and speculative risk; property values may increase, and the building could burn down B. Buying a boat is a nondiversifiable risk because George can only afford to purchase a single yacht. C. Purchasing T-bills is a pure risk because the interest rate payable is known, and the chance of loss is minimal. D. Donating his inheritance to charity is a pure risk; there is no uncertainty that the money will be gone and George will have no chance of profit.
A. The rental property presents both pure and speculative risk; property values may increase, and the building could burn down
Which one of the following best explains how most smart products potentially improve risk management? Select one: A. They generate big data to which advanced analytics can be applied. B. They scan and inspect structures for unsafe conditions. C. They assess risks in dangerous areas. D. They measure worker fatigue.
A. They generate big data to which advanced analytics can be applied.
Quade Enterprises has been targeted by animal rights groups due to its use of animals in product testing. One night, bricks are thrown through the front windows of Quade's corporate headquarters. This act is an example of Select one: A. Vandalism. B. Political terrorism. C. Breaking and entering. D. Extortion.
A. Vandalism.
Which one of the following is an earthquake-resistant building design used for structures less than three stories tall, that integrates the roof and floor diaphragms that can flex to transmit and distribute forces? Select one: A. Geological design B. Box action design C. Frame action design D. Shock wave design
B. Box action design
The cost of replacing damaged property with similar property that performs the same function but might not be identical to the damaged property is known as Select one: A. Market value. B. Functional replacement cost. C. Reproduction cost. D. Partial replacement cost.
B. Functional replacement cost.
Which one of the following is the inherent weakness of root cause analysis (RCA)? A. It relies on real-time data. B. It can only look backward. C. It must be performed continuously. D. It looks at both threats and opportunities.
B. It can only look backward.
A conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable is Select one: A. A consequence of risk. B. Risk control. C. Risk prevention. D. A risk source.
B. Risk control.
Do-It-Yourself (DIY) is a chain of building material and home repair stores located in the Southeastern part of the United States. DIY always experiences a "run" on sheets of plywood and generators whenever hurricanes occur. Customers also want fuel and bottled water when they come to DIY after hurricanes. To speed the process of getting necessary products to stores with the greatest need, DIY entered into a contract with a supplier that will ship extra products overnight to stores close to where a Category 3 or higher hurricane is expected to make landfall. DIY uses forecast data from the National Weather Service. So far, the results have been favorable. DIY's standing order to have products sent to its stores when hurricane losses are imminent is an example of a Select one: A. Contingent capital arrangement. B. Smart contract. C. Risk management information system. D. Robotic process automation.
B. Smart contract.
A source of a rapidly growing quantity of external data is Select one: A. Industry loss data. B. The Internet of Things. C. Computers. D. Risk management and insurance professionals.
B. The Internet of Things.
InterMountain Railroad carries logs, lumber, plywood, and other forest products in a six-state region in the Western part of the United States. InterMountain self-insures its derailment cargo losses. The risk manager at InterMountain ran a regression using ton-miles (one ton of cargo carried one mile) as the independent variable and dollar losses as the dependent variable. The independent variable is in units per 10,000 and the dependent variable is per 1,000. The resulting regression equation is: y = 2.65 x + (−13.8) Next year, InterMountain estimates that it will record 5,000,000 ton-miles of shipments. Given a building materials shortage, projected for next year, the cargo will be more valuable, so a 12% increase in value factor should be applied to the dollar loss estimate. Based on this information, what are InterMountain's final expected derailment cargo losses for next year, rounded to the nearest $10? Select one: A. $1,470 B. $146,850 C. $1,468,540 D. $14,839,990
C. $1,468,540 y-intercept = −13.8; slope = 2.65; y = (2.65 × 500) + (−13.8) = 1,311.2; 1,311.2 X 1.12 = 1,468.54; 1,468.54 X 1,000 = 1,468,540. InterMountain's final expected derailment cargo losses for next year are $1,468,540.
Risk manager Martin is using linear regression analysis to forecast production losses. He charts the annual number of losses per 1,000 (1 through 8) on the vertical (y) axis and charts the years (1 through 5) on the horizontal (x) axis. Martin has calculated the slope as .6 and the y-intercept as 3. Based on this trend line, Martin projects losses for year 6 to be Select one: A. 5,000. B. 6,000. C. 6,600. D. 7,800.
C. 6,600. Correct. y = mx + b; y = .6(6) + 3 = 6.6; 6.6 ×1,000 - 6,600. Based on this trend line, Martin projects losses for year 6 to be $6,600.
In today's business environment, holistic risk management needs to be a collaborative effort. Which one of the following types of risk is the best example of why collaboration is needed? Select one: A. Hazard risk B. Liability risk C. Cyber risk D. Liquidity risk
C. Cyber risk
Which one of the following team approaches to risk identification involves a select group of experts in question-and-response cycles until a consensus is achieved? Select one: A. Scenario analysis B. HAZOP C. Delphi technique D. SWOT
C. Delphi technique
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? Select one: A. Identifying whether a particular loss exposure is high-frequency and low-severity, or high-severity and low frequency B. Selecting which risk management technique 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. Predicting when losses, such as physical damages losses to an automobile fleet, are likely to occur
C. Determining a maintenance schedule for equipment that could become dangerous if it were to fail
Moving rapidly to detect and evaluate damage and to counter its continuation or spread by giving first aid or protecting property in imminent danger of fire is a basic strategy of the Select one: A. Technique of operations review approach. B. Change analysis. C. Energy transfer theory. D. Sequence of events theory.
C. Energy transfer theory.
HVAC Supply Company has decided to promote a new brand of air conditioning unit. The manufacturer of the new units claims that they are lighter, more efficient, and less expensive than the two well-known brands that HVAC Supply Company currently sell to customers. HVAC Supply Company is hoping that the lower cost will attract new customers. HVAC Supply Company will be exposed to which one of the following types of strategic risk? Select one: A. Procurement risk B. Liquidity risk C. Marketing risk D. Acquisition risk
C. Marketing risk
An amount charged to make up for losses in a state-sponsored plan to insure high-risk exposures, such as an assigned risk plan for auto insurance is known as the Select one: A. Coinsurance penalty. B. State premium tax. C. Residual market loading. D. Guaranty fund assessment.
C. Residual market loading.
Many auto manufacturers have automated a portion of their assembly lines by introducing a smart product. The smart product performs repetitive tasks, such as making the same weld on each vehicle frame as it passes the smart product. These smart products, which can be fixed or mobile, reduce repetitive motion injuries. They can also be used to perform dangerous tasks and for heavy-lifting jobs. These smart products are called Select one: A. Drones. B. Wearables. C. Robots. D. Automated sensors.
C. Robots.
The chief financial officer for Apex Tires is considering a proposal from the Director of Manufacturing to have half of their production outsourced to an offshore company. After thinking through the plan, he decides they can reduce overall cost and also improve their risk control program. What technique does this outsourcing represent? Select one: A. Loss reduction B. Duplication C. Separation D. Loss prevention
C. Separation
Directors (and sometimes officers) owe a duty of loyalty to the Select one: A. Employees that support the corporation they serve. B. Federal Securities and Exchange Commission. C. Stockholders who elect them. D. Customers of the corporation they serve.
C. Stockholders who elect them.
Which one of the following concerns should an organization consider when using a Special Purpose Vehicle (SPV) to generate cash from income-producing assets? Select one: A. The federal government only allows certain types of loans to be sold to an SPV. B. The outcome of using an SPV is not very beneficial for the organization in the long run. C. The organization must maintain a high level of disclosure regarding the SPV's assets. D. The cash generated from the sale of income-producing assets to an SPV carries an additional credit risk for the organization.
C. The organization must maintain a high level of disclosure regarding the SPV's assets.
Which one of the following steps of the risk management process requires the risk professional to carefully balance his or her own experience and that of the subject matter experts? Select one: A. Identifying risks B. Analyzing risks C. Treating risks D. Scanning the environment
C. Treating risks
In which one of the following situations should managers and supervisors practice using "I" messages instead of "you" messages? Select one: A. When they are communicating up the chain of command B. When they are communicating with external stakeholders C. When they are identifying a problem with an employee's work D. When they are working with a diverse group of people
C. When they are identifying a problem with an employee's work
In an effort to grow its personal lines book, an insurer decides to offer discounts on homeowners and personal auto insurance to the employees of its largest business lines account. Which one of the following risk measures is most likely to increase as a result of this marketing decision? Select one: A. Consequences B. Volatility C. Time horizon D. Correlation.
D. Correlation.
A disadvantage of value-at-risk (VaR) is that VaR Select one: A. Expresses complex positions in a single value. B. Uses monetary units to express the potential loss rather than percentages. C. Quantifies the potential loss associated with an investment decision. D. Does not accurately measure the extent to which a loss might exceed the threshold.
D. Does not accurately measure the extent to which a loss might exceed the threshold.
The use of risk quadrants to identify and categorize risk provides a framework for Select one: A. Positive risk identification. B. Environmental risk identification. C. Emerging risk identification. D. Holistic risk identification.
D. Holistic risk identification.
Premier Lighting Company was awarded the contract to install all the lighting fixtures at Big City's convention center. Some of the fixtures required assembly, and Premier hired A-1 Electrical to assemble the fixtures, under Premier's supervision. In the contract to perform the assembly, A-1 transferred all responsibility for any liability to Premier. Premier agreed to be responsible for any liability arising out of assembly and installation of the light fixtures and to hold A-1 harmless for any claims alleging joint fault. This transfer of responsibility for joint fault is which one of the following forms of noninsurance risk financing transfer? Select one: A. Broad form B. Unconscionable form C. Limited form D. Intermediate form
D. Intermediate form
Which one of the following is an analysis that dissects a repetitive task to determine potential hazards if each action is not performed? Select one: A. Root cause analysis B. Change analysis C. Fault tree analysis D. Job safety analysis
D. Job safety analysis
Which one of the following indicates the values of the target variable on a classification tree? Select one: A. Classifications B. Attributes C. Arrows D. Leaf nodes
D. Leaf nodes
Elliott Industries has just invested a large sum in new, highly-sophisticated computer equipment and building renovations. The building renovations created an airtight, oxygen-free, vacuum-sealed room to house the expensive equipment. For fire losses initiating in that room, the airtight, oxygen-free, vacuum-sealed room is an example of A. Loss reduction.Incorrect. For fire losses, the airtight, oxygen-free, vacuum-sealed room is an example of loss prevention. B. Avoidance. C. Separation. D. Loss prevention.
D. Loss prevention
Jill's Dress Cottage recently added an elaborate sprinkler system which cost $9,000. Jill is hoping that she will be able to obtain a discount on her property insurance as a result of making her property safer. Jill's decision to add the sprinkler system is an example of which one of the following risk management techniques? A. Avoidance B. Loss preventionIncorrect: Adding the sprinkler system would not avoid the loss or prevent fire losses. Jill has only one facility and there is no separation of assets. C. Separation D. Loss reduction
D. Loss reduction
Technological advancements have affected all risk treatment techniques. Which two techniques have been impacted most? Select one: A. Avoidance and modification B. Retention and avoidance C. Transfer and retention D. Modification and transfer
D. Modification and transfer
Which one of the following statements best describes the shareholders' equity section of the balance sheet? Select one: A. Shareholders' equity decreases by the amount of debt satisfied during the year. B. Shareholders' equity is negative when the entity reports a net loss for the year. C. Shareholders' equity is an asset of the business entity. D. Shareholders' equity is negative when liabilities exceed assets.
D. Shareholders' equity is negative when liabilities exceed assets.
B. Independent.
For insurers to utilize pooling most effectively, the insured exposure units need to be Select one: A. Correlated. B. Independent. C. Adjacent. D. Different.
C. Price risk.
Four Grains Cereal Company signed a contract to deliver 250,000 boxes of cereal to a national supermarket chain at a specified price per box of cereal six months from today. Between now and when the grain to make the cereal is purchased, the cost of the grain may increase. If the cost of this important ingredient increases, the profitability of the transaction will be altered. This financial risk that Four Grains faces is Select one: A. Market risk. B. Credit risk. C. Price risk. D. Exchange rate risk.
C. 15.87%Correct. The percentage of diamond points that are likely to wear out before 80 days is 15.87%. 80 days = −1 standard deviation; the area on the normal distribution below −1 is .13 + 2.15 + 13.59 = 15.87.
Granton Manufacturing uses diamond-point cutting tools to manufacture metal plates. The diamond points have an average life of 90 days. Some points last longer and others wear out more quickly; however, overall the average life of the diamond points follows a normal distribution curve with each standard deviation equaling 10 days. Replacing a point requires only 15 minutes. However, if a point fails, Granton often must scrap some of the metal plates, and the process to return to full operations takes over two hours. What percentage of diamond points are likely to wear out before 80 days? Select one: A. 0.13% B. 2.15% C. 15.87% D. 34.14%
C. Structured or unstructured.
In order to be useful, data should be Select one: A. Unstructured. B. Internal. C. Structured or unstructured. D. Structured.
A. Risk criteria.
Information used as a basis for measuring the significance of a risk is called Select one: A. Risk criteria. B. Risk profiles. C. Key risk indicators. D. Risk maps.
D. Current ratio
Jones, Inc. buys grain from local farmers and re-sells the grain to a number of customers. Jones, Inc. has been approached by Snack Cracker Company. Snack Cracker would like to purchase wheat and corn from Jones, Inc. to use in the crackers it produces. Snack Cracker would like to pay for the grain within 30 days of the date the grain is delivered. As Snack Cracker is a new customer, Jones, Inc. asked to review its financial statements. Which balance sheet ratio would best assist Jones, Inc. in determining if Snack Cracker can pay for the grain within 30 days of the sale? Select one: A. Debt-to-equity ratio B. Debt-to-assets ratio C. Equity-to-assets ratio D. Current ratio
B. 5.60% .40 x .20 x .70 = 5.60%; There is a 5.6% probability of severe pollution from the tank occurring in the next five years.
Pacific Fuel Company stores refined gasoline in a large underground storage tank, which is encased in a second tank, called a "double hull." Pacific Fuel's risk manager, Merrill, is concerned that fuel could leak from the tank and pollute the ground. To analyze this risk, he constructed an event tree. He believes there is a 40% probability that there will be a leak in the tank in the next five years and, if a leak occurs, he believes there is an 80% probability that the second hull will contain the leak. If the second hull does not contain the leak, he believes there is a 70% chance of severe pollution and a 30% chance of minor pollution. What is the probability of severe pollution from the tank occurring in the next five years? Select one: A. 2.40% B. 5.60% C. 9.60% D. 22.40%
A. The use of telematics to reduce operational risk.
Ready Van Lines installed sensors in all the vehicles in the company fleet. The sensors record fluid levels, tire pressure, and key mechanical data. The sensors also record driving behavior, such as rate of acceleration from a standing stop, braking time, average highway driving speed, and hours of use. The data obtained from the sensors helps Ready Van Lines to target vehicle maintenance and repair needs, as well as unsafe driving behavior. All Ready Van Lines use of the sensors illustrates Select one: A. The use of telematics to reduce operational risk. B. The use of robotic process automation to reduce data entry errors. C. The use of blockchain to improve financial results. D. The use of data analytics to improve competitive position.
C. Systemic risks are generally nondiversifiable.
Regarding diversifiable and nondiversifiable risk, which one of the following statements is accurate? Select one: A. An example of a diversifiable risk is inflation. B. Risks must be either diversifiable or nondiversifiable. C. Systemic risks are generally nondiversifiable. D. An example of a nondiversifiable risk is a fire.
C. Pathos
Samuel is preparing for a speech at a town hall meeting. He knows that he is one of the last speakers on the agenda, and he has only been given five minutes to speak. Samuel decides that he will tell a story about his family that he believes many in the audience will relate to. He hopes the story will leave the audience with a sense of anger. Which one of the following modes of persuasion is Samuel using? Select one: A. Axios B. Logos C. Pathos D. Ethos
C. Tolerable uncertainty and earnings stability
Sean recently started a small consulting practice. Sean is the only employee of the business and the sole generator of revenue. Sean is very concerned that in the event that he becomes disabled due to an accident or disease there will be no revenue coming into the business. Which one of the following goals best identify Sean's concerns? Select one: A. Legality and profitability B. Economy of operations and survival C. Tolerable uncertainty and earnings stability D. Social responsibility and earnings stability
D. A systems risk.
Sixth National Bank stores all of its financial records in an electronic data base. Sixth National customers are able to access their accounts on-line with a user identification number and a password. Last weekend, a computer hacker was able to breach the firewall of the electronic database and gain access to customer account data. This operational risk for Sixth National Bank is Select one: A. An external event risk. B. A credit risk. C. A process risk. D. A systems risk.
B. PESTLE analysis examines the political, economic, sociological, technological, legal, and environmental aspects of the external environment.
The strategic management process begins with an analysis of the organization's internal and external environments. Which one of the following statements is correct with respect to that analysis? Select one: A. SWOT analysis focuses on an organization's internal strengths and weaknesses rather than on the external environment in which it operates. B. PESTLE analysis examines the political, economic, sociological, technological, legal, and environmental aspects of the external environment. C. The SWOT, PESTLE, and Five Forces Model analysis methods tend to be mutually exclusive and are not generally used together. D. The Five Forces Model focuses on internal strengths, such as an organization's reputation, expert personnel, valuable patent rights, or large market share.
B. Implementing the strategies
The strategic management process includes five interdependent stages. Which one of the following stages requires all parts of the organization to play a role? Select one: A. Analyzing internal and external environments B. Implementing the strategies C. Developing short- and long-term goals D. Formulating strategies
B. Closeness
Tom, the regional manager at Westfork Mutual, has planned a community service day for all employees. He has asked his two assistant managers, Julian and Leah, to spread the word to other employees and encourage them to attend. Based on centrality measures of the company's email traffic, Tom is confident that Julian will spread the word to more employees more quickly through email than will Leah. Tom's confidence is based on Julian's high score in which one of the following centrality measures? Select one: A. Association B. Closeness C. Betweenness D. Degree
A. Retaliation claim
What is the name given to a claim by an employee who says that he or she was fired because of the filing of a workers compensation claim? Select one: A. Retaliation claim B. Harassment claim C. Discrimination claim D. Insurance claim
B. Fraud
Which one of the following is a legal and regulatory concern when personal information is obtained from public sources? Select one: A. Veracity B. Fraud C. Volume D. Privacy
B. Risk tolerance
Which one of the following is the term used to refer to the amount of uncertainty an organization is prepared to accept in total or more narrowly within a certain business unit, a particular risk category, or for a specific initiative? Select one: A. Uncertainty threshold B. Risk tolerance C. Risk appetite D. Aversion threshold
C. The standards of the Life Safety Code® are incorporated into the statutes and ordinances of most United States localities.
Which one of the following statements is true regarding the Life Safety Code®? Select one: A. Failing to comply with the Life Safety Code® is a breach of contract B. Compliance with the Life Safety Code® is usually voluntary and optional. C. The standards of the Life Safety Code® are incorporated into the statutes and ordinances of most United States localities. D. The Life Safety Code® considers the general characteristics of building construction and external protection.
A. HAZOP
Which one of the following team approaches to risk identification is primarily used to design complex, scientific systems? Select one: A. HAZOP B. Delphi technique C. SWOT D. Scenario analysis
