BDU CPCU 500

A financial transaction in which one asset is purchased to offset the risk associated with another asset is referred to as:

Hedging

Resolving a litigation claim through mediation is a measure that falls within the risk control techniques of:

Loss reduction

The analysis step of the risk management process involves the consideration of four dimensions of a loss exposure. Which one of the following represents one of the four dimensions:

Loss severity

The risk control technique that isolates loss exposures from one another to minimize the adverse affect of a single loss is:

Seperation

An example of upside risk includes:

An organization experiencing an unexpected increase in earnings

All of the following represents steps in the business continuity process, EXCEPT:

Arrange appropriate insurance coverage

Office furniture, copyrights, and cash are all examples of:

Assets exposed to losses

The risk control technique that uses copies of critical property and keeps them in reserve is:

Duplication

ABC Company is opening a new plant in Texas. They purchased an existing factory building from a small business. They estimate their costs of the factory as follows: Cost of building - $10,000,000 Insurance premiums - $250,000 Security System upgrade - $400,000 Safety system upgrade - $600,000 Risk management administration cost - $100,000 Retained losses - $500,000 The cost of risk of opening the new factory is:

$1,850,000

In an array of 20 losses, the expected value of loss frequency is 4.9 and the expected value of loss severity is $385.50. The expected total dollar loss is:

$1,888.95

Pete has a printing business that runs out of a single warehouse. He employs 10 individuals at a total cost of $30,000 per month He also has the following property: Building - $80,000 Equipment - $40,000 Supplies - $10,000 If Pete's property is destroyed, and he is out of business for one month, the maximum possible loss is:

$130,000

Assume 47.5% of all outcomes are within two standard deviations below the mean, and 2% of all outcomes are between 2 and 3 standard deviations below the mean. What percentage of all outcomes lies beyond 3 standard deviations above and below the mean?

1.0%

An insurer is beginning to write policies in a new state. Based on marketing information, the mean number of new claims is estimated to be 5,000 with a standard deviation of 1,000 in a normal distribution. If a claim representative can handle 600 claims per year, and the insurer wants 68% certainty that enough representatives have been hired, the insurer will need to hire:

10 new representatives

Assume 34.13% of all outcomes are within one standard deviation above the mean, and 13.59% of all outcomes are between one and two standard deviations above the mean. If the outcomes are normally distributed, what percentage is contained in the area between the mean and two standard deviations below the mean?

47.72%

Tina is analyzing a probability distribution with the following outcomes: 1: 5 2: 5 3: 6 4: 7 5: 8 6: 8 7: 8 8: 10 9: 15 10: 18 The mean and mode for this distribution is:

9 and 8

Which of the following statements is correct regarding risk and related terms?

A peril is the cause of a loss, such as a theft or a fire.

A risk financing plan that adjusts an insured's premium for a policy period based on the insureds own losses during that period is referred to as:

A retrospective rating plan

Which one of the following statements is correct regarding risk financing measures?

An organization must have a substantial premium to benefit from retrospective rating plan

Which one of the following planned retention funding measures recognizes in advance the potential for loss, but does not support the potential for loss with any specific assets of the organization?

An unfunded reserve

An underwriter is choosing between the following two accounts: Account 1 - $3,500 mean loss and $3,300 standard deviation. Account 2 - $2,100 mean loss and $2,800 standard deviation. Based on these assumptions, the underwriter should select:

Account 1, because the coefficient of variation is lower

Jim is concerned that he will be involved in a plane crash. As a result, he does not travel by plane. The risk control technique Jim is using is:

Avoidance

Which one of the following statements is correct regarding risk management techniques?

Avoidance is a risk control technique that eliminates any possibility of loss

Tommy recently received a gift from his father in the amount of $30,000. He would like to make a purchase, but is concerned with the risks associated with the different assets purchased. If Tommy decides to purchase a rental property with the gift, Tommy will have:

Both pure and speculative risk

Which one of the following statements is correct regarding expected cost of losses or gains?

Calculating the expected costs of gains or losses is more difficult for speculative risks than for pure risks.

A correct statement regarding the cost of residual uncertainty is that it:

Can be minimized, but doing so is costly

A correct statement regarding probabilities is that they:

Can be used to decide what activities to undertake.

Which one of the following statements is correct regarding risk financing measures?

Captive insurers are used to insure property loss exposures that are difficult to insure in the primary market.

Which one of the following statements is correct regarding loss exposure?

Commercial property loss exposures are commonly examined based on construction, occupancy, protection and environment

To accurately analyze loss exposure data on past losses, the data should meet certain criteria. Based on this criteria, the data should be:

Complete

The most important risk management goal of public entities, such as governing bodies and utilities, is:

Continuity of operations

One of the advantages that risk retention offers to an organization is:

Controlling the claims process

XYZ Company suffered a loss of $100,000 in 2003. Based on a reasonable inflation rate, the loss today would be $130,000. The $130,000 represents the loss expressed in:

Current dollars

Which one of the following statements is correct regarding the selection of appropriate risk financing measures?

Diversifying loss exposures tend to increase the accuracy of loss estimates, and reduces uncertainty regarding future losses.

Which one of the following statements is correct regarding the analysis of loss exposure?

Data credibility may be affected by internal factors such as changes in the way an organization operates.

Which of the following statements is correct regarding risk financing methods?

Deductibles are a type of partial risk retention

The first step in integrating enterprise-wide risk management with strategic planning is to:

Develop goals for the organization's business model

If a distribution is skewed, the mean and median values will:

Differ, and the median value will typically be a better predictor than the mean as to what is most likely to occur.

Tommy recently received a gift from his father in the amount of $80,000. He is planning on purchasing an expensive sports car with the money. If Tommy decides to purchase the car, Tommy will have:

Diversifiable risk

The best example of pure risk is:

Driving to work in an old car

Which one of the following statements is correct regarding risk control techniques?

Duplication reduces loss severity and makes losses more predictable, without increasing loss frequency

Achieving any post-loss goal involves expending risk management resources. This may conflict with the pre-loss goal of:

Economy of operations

Which one of the following statements is correct regarding the nature of probability?

Empirical probabilities are only estimates whose accuracy depends on the size of the samples

The number of 65-year old females that are expected to die in the upcoming year can be determined using:

Empirical probability

Which one of the following represents a goal of risk control?

Ensure Business continuity

Which one of the following statements is correct regarding the differences in risk categories between traditional risk management and enterprise-wide risk management?

Enterprise-wide risk management seeks to optimize risk-taking in relationship to strategic goals.

Stan is a risk professional involved in his company's enterprise-wide risk management program. He is currently involved in a study to determine if favorable exchange rates have increased the overseas demand for the company's products. Stan is involved in which one of the steps of the ERM process?

Evaluate and prioritize critical risks

A risk management program must be monitored and revised periodically. The process involves four steps. Which one of the following is one of the four steps?

Evaluate standards that have been substantially exceeded.

Which one of the following statements is correct regarding the classification of risk?

Every business venture involves speculative risks, because speculative risks involve a chance of gain.

After identifying and analyzing loss exposures, the next step in the risk management process is to:

Examine feasibility of techniques

The best example of diversifiable risk is:

Financial risk

Which one of the following statements is correct regarding loss exposures?

For an organization, human resources are considered an asset that is exposed to losses.

A method of analysis that identifies conditions that increase the frequency or severity oF loss is:

Hazard analysis

Which one of the following represents a step in the business continuity process?

Identify the risks to the organization's critical funtions

Which steps of the risk management process together constitute the process of assessing loss exposure?

Identifying loss exposures and analyzing loss exposures

Enterprise-wide risk management considers the global array of risks that affect an organization. The exposure spaces model of enterprise-wide risk management considers the attributes of:

Impacts, events and resources

An organization that has adopted enterprise-wide risk management monitors threats and opportunities arising from various sources. The benefits provided by this approach versus traditional risk management are:

Improved risk communication and enhanced decision making

The most common basis of an analysis of loss exposures is:

Information relating to past losses arising from similar loss exposures.

Ralph manages three jewelry stores in the same city. He notes upon reviewing insurance claims that most incidents of theft occur in one of the stores. To manage this exposure, he installs security bars on the windows and upgrades the security alarm of that store. He believes theses changes will reduce the number of thefts. Which one of the following risk control techniques is Ralph using?

Loss prevention

Which one of the following risk control techniques has a primary objective of reducing loss frequency?

Loss prevention

Which one of the following statements is correct regarding the use of dispersion?

Insurers can use the coefficient of variation to determine whether a loss control measure has made losses more predictable.

Which of the following statements is correct regarding a normal distribution?

It assigns some probability for each outcome, regardless of its distance from the mean.

Which one of the following statements is correct regarding a normal distribution?

It can be used to help insurance professionals marshal resources to control losses.

Which one of the following statements is correct regarding the law of large numbers?

It is only effective if the events being forecast are independent of one another, and have occurred in the past under substantially identical conditions.

The horizontal axis of this graph reflects possible outcomes, while the vertical access reflects the probability of that outcome. Which one of the following statements is correct regarding this graph?

It represents a discrete probability distribution

Which one of the following statements is correct regarding common risk financing goals of an organization?

Laws and regulations sometimes dictate specific risk financing measures.

A risk management professional for an organization should be aware of the organization's contractual obligations in order to satisfy the pre-loss risk management goal of:

LegalityExamine the feasibility of techniques

For traditional risk management and insurance purposes, loss exposures are typically divided up into:

Liability, net income, property, and personnel loss exposure

Placing a restriction on an employee's hazardous activities, such as sky diving, is an example of which one of the following risk control techniques?

Loss prevention

Two risk control measures directly aimed at reducing the severity of net income losses are:

Separation and duplication

An organization that incorporates enterprise-wide risk management with its strategic planning process improves its decision making because the organization can:

Manage unwanted variations from expectations

Which one of the following statements is correct regarding risk control goals?

Many laws and regulations require organizations to implement specific risk control measures.

To function effectively, the law of large numbers requires all of the following characteristics EXCEPT:

Measurability

A hazard that is evidenced by dishonest tendencies is referred as a :

Moral hazard

Valerie ran into some financial difficulty due to a gambling problem. She embezzled some money from her employer to help pay her rent. Valerie's behavior is an example of:

Moral hazard

Tom has a habit of leaving his home unlocked when he leaves to go shopping. Tom's behavior is an example of:

Morale hazard

If two distributions are symmetrical and have the same mean return, the distribution with the lower standard deviation will have a:

More peaked distribution

Which one of the following statements is correct regarding the analysis of loss exposure?

Most organizations do not have enough exposure units to accurately predict events that are low frequency and high severity

Which one of the following statements is correct regarding the concepts of risk retention and risk transfer?

Most risk transfer measures limits the potential amount of loss being transferred.

Which one of the following statements is correct regarding the elements of loss exposure?

Net income loss exposure can result from personnel, liability and property losses.

The mean and median will be equal if the shape of the distribution is:

Normal

While identifying risks to strategy using the enterprise-wide risk management process, ABC Company determines there is a high likelihood an event will occur that decreases the product output for one of their competitors. The most appropriate technique fro treating this risk is:

Optimize

While identifying risks to strategy using the enterprise-wide risk management process. ABC Company determines there is a high likelihood their unique manufacturing capabilities will be needed for an emerging product. The most appropriate technique for treating this risk is:

Optimize

Which one of the following statements is correct regarding the business continuity process?

Over time, business continuity plans have been expanded to handle interruptions caused by personnel losses and human failures.

Which one of the following statements is correct regarding the classification of risk>

Private insurance tends to focus on diversifiable risks, while government insurance is typically appropriate for non-diversifiable risks.

Which one of the following statements is correct regarding the concept of risk?

Probability can be used to decide which risk management techniques to use.

Which one of the following statements is correct regarding liability loss exposures?

Professional liability refers to liability created by common law, which imposes a higher standard of care on certain individuals

Insurance is primarily designed to address:

Pure Risk

Which one of the following statements is correct regarding classification of risk?

Pure risk involves the possibility of loss or no loss.

Insurable risks are generally categorized as:

Pure, objective, and diversifiable

Stacy has determined there is a 10% chance she will be injured sky diving. This is an example of:

Quantifying risk

Which one of the following statements is correct regarding the use of documents to identify loss exposures?

Questionnaires developed by insurers relate mainly to loss exposures for which commercial insurance is generally available.

One of the advantages that risk transfer offers to an organization is:

Reducing exposure to large losses

In an enterprise-wide risk management structure, the chief risk officer typically:

Reports to the chief executive officer, and develops individuals identified as risk owners.

Which one of the following statements is correct regarding the use of documents to identify loss exposures?

Risk assessment questionnaires usually involve considerable time, expense, and effort to complete and still may not identify all loss exposures.

Which of the following techniques for treating risk is the most appropriate for a risk that has a high frequency and a high loss severity?

Risk avoidance

Which one of the following represents a type of risk that enterprise-wide risk management would treat, but that traditional risk management would not?

Risk of legislative changes

Which one of the following statements is correct regarding the concept of risk retention?

Risk retention allows an organization to manage its cost of risk.

Which one of the following statements is correct regarding risk retention and risk transfer measures?

Risk retention can be the most economical form of risk financing, but it also exposes the organization to the most variability of cash flow.

All of the following are methods of risk control EXCEPT:

Risk transfer

Which one of the following techniques for treating risk is the most appropriate for a risk that has low frequency and a high loss severity?

Risk transfer

Placing a restriction on the number of key employees who can fly on the same airplane is an example of which one of the following risk control techniques?

Separation

Which one of the following statements is correct regarding risk management program goals?

Social responsibility is considered both a pre-loss goal and a post loss goal for many organizations

Which one of the following statements is correct regarding the cost of residual uncertainty?

Society benefits from the great differences in residual uncertainty that individuals and organizations are willing to accept.

Which one of the following statements is correct regarding the use of dispersion?

Standard deviation indicates how widely dispersed the value in a distribution are:

Which one of the following risk is considered by enterprise-wide risk management but not considered by traditional risk management?

Strategic risk

One enterprise-wide risk management approach involves dividing risks into quadrants. Which one of the following statements is correct regarding these quadrants?

Strategic risks are speculative risks that fall outside the operational risk category.

Business continuity management is primarily designed to meet which of the following risk management goals?

Survival

Which one of the following statements is correct regarding traditional risk management versus enterprise risk management in approaching business uncertainties?

The ERM approach improves management consensus by creating a culture that embraces risk as a component of each decision.

ABC Manufacturing company has one plant with 200 employees. The workers compensation history indicates a large number of back injuries suffered by employees. ABC Manufacturing hired a back injury consultant to conduct several seminars for employees. The consultant suggested that ABC Manufacturing purchase back braces for its employees. Which one of the following statements is correct regarding these risk control techniques?

The educational seminars represent loss prevention, and the purchase of back braces represent loss reduction

Which one of the following statements is correct regarding risk management program goals?

The goal of social responsibility includes both the pre-loss and post-loss goal of acting ethically and full-filling obligations to society as a whole

Which one of the following statements is correct regarding common risk financing goals of an organization?

The maximum cash flow variability an organization will accept is affected by its financial strength and risk tolerance of shareholders.

Which one of the following statements is correct regarding the use of central tendency?

The median is the value at the midpoint of a sequential data set with an odd number of values.

Which one of the following statements is correct regarding the use of central tendency?

The mode represents the most frequently occurring values in a distribution

Which one of the following statements is correct regarding risk financing measures?

The premium in a finite risk insurance plan is a very high percentage of the policy limits

Which one of the following statements is correct regarding the advantages offered by risk transfer and risk retention measures?

The reduction on cash flow variability is an advantage of risk transfer measures that is valued by investors.

Which one of the following statements is correct regarding the use of probability distribution?

The sum of all event probabilities in a probability distribution must be equal to 1, or 100%

Probabilities associated with coin tosses or dice throws can be developed using:

Theoretical probability

Which one of the following statements is correct regarding empirical probability distribution?

There is no evident upper limit in size category of loss.

Which one of the following statements is correct regarding continuous probability distributions?

They can be presented by dividing the distribution into a countable number of bins.

The table below presents the probability distribution of physical damage to a home for a group of insured houses. $0-$10,000 16 40% $10,001 - $20,000 14 35% $20,001 - $30,000 8 20% $30,000+ 2 5% Total 40 100% Which one of the following statements is correct with respect to the information it provides?

This represents a continuous probability distribution

Which of the following represents a hidden cost associated with an industrial accident?

Time lost by other employees who witnessed the accident

Which one of the following statements is correct regarding personal inspections?

To be effective, they should be accompanied by discussions with front-line personnel of the organization.

Which one of the following represents an example of a pre-loss goal?

Tolerable uncertainty

Which one of the following statements is correct regarding the ability of retention and transfer to meet risk financing goals?

Transfer is more effective than retention in managing cash flow variability

A pharmaceutical company developed a new drug that was designed to treat skin blemishes. The drug additionally caused weight loss, resulting in sales that vastly out performed the company's original estimates. This is an example of:

Upside risk

A correct statement regarding the use of enterprise-wide risk management is approaching business uncertainties is that it:

improves the buy-in by stakeholders by encouraging cooperation