CPCU_1_2

For a theoretical probability distribution, which of the following statements best describes the mean? A. It is the average of the possible outcomes weighted for their probability. B. It is the average of the observed outcomes weighted by their frequency. C. It is the midpoint value in a sequence of outcomes. D. It is the value that occurs most frequently.

A

In order to avoid underestimating or overestimating loss projections, historical loss data must be expressed in Choose one answer. A. Constant dollars. B. Functional dollars. C. Nominal dollars. D. Total dollars.

A

Risk control should aim to minimize or eliminate significant business interruptions, whatever their cause. A. True B. False

A

What benefits should an organization achieve with an effective risk management program? A. Smaller expected losses and less residual uncertainty B. Reduced expenditure on risk management and greater willingness to take risk C. Greater diversification of risk and less impact on strategic decision making D. Reduced overall risk and better integration of risk assessment with planning

A

When choosing risk financing plans, which plan is most likely to be used for losses of moderate severity? (Text 1.16) (A) Retention or transfer (B) Retention only (C) Transfer only (D) Hybrid only

A

Which of the following actions by an organization will be most likely to encourage external stakeholders to accept an organization's ERM program? (Text 5.23) A. Adopting strategies to protect the organization's reputation and assets B. Building a spirit of cooperation among management C. Projecting the different risks and rewards at various levels of the organization D. Presenting a strong hierarchical leadership model of management

A

Which of the following describes counter-party credit risk? (Text 4.13) A. The risk that an organization to which risk has been transferred will not pay for losses B. The risk that an organization that has transferred risk will not be able to pay losses when the transferor does not pay C. The risk that an organization's credit will be affected by its retention of losses D. The risk that an organization that self-insures will not be able to pay losses

A

Which of the following statements concerning captives that insure third-party business is correct? (Text 4.27) A. Many domiciles have more burdensome capital requirements for these captives. B. There is less risk for these captives because the business is usually profitable. C. These captives do not require any more underwriting, actuarial, or marketing expertise. D. These captives will only insure business directly related to the parent and affiliates.

A

Which of the following statements is true of the relationship between frequency and severity of losses? (Text 1.12) (A) As severity increases, frequency decreases. (B) As severity decreases, frequency decreases. (C) The more frequent losses are the higher valued ones. (D) There is no correlation between frequency and severity.

A

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

A

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.

A

Why is it important for an organization to determine the criticality of the risks it faces? (Text 5.15) A. So the organization can prioritize risks for treatment. B. So the organization can identify the risks to its strategies. C. So the organization can ask "what if" questions about these risks. D. So the organization can evaluate trends affecting these risks.

A

With catastrophe bonds, the investor's return is calculated on the basis of: (Text 4.38) A. Property losses from hurricanes B. U.S. Treasury bond interest rates C. Stock market index D. Hedging

A

_ are called probability density functions A. Continuous probability distributions B. Discrete probability distributions

A

_ are typically used for severity distributions A. Continuous probability distributions B. Discrete probability distributions

A

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.

B

All of the following are examples of loss reduction techniques, EXCEPT: A. Automatic sprinkler system B. Security bars on windows C. Firewalls D. Moving operations to another location after a fire

B

All of the following statements concerning large deductible plans are correct, EXCEPT: (Text 4.23-4.25) A. The insurer adjusts and pays all claims even those below the deductible. B. The plan will not comply with laws requiring insurance due to the large deductible. C. Liquidity is maintained if the deductible is carefully selected. D. The insured must give the insurer a guarantee of payment of losses under the deductible.

B

All of the following statements describe purposes for exclusions in insurance policies, EXCEPT: (Text 1.37-1.38) A. They assist in managing moral and morale hazards. B. They prevent an insured from profiting from a covered loss. C. They eliminate coverage for uninsurable exposures. D. They remove coverage that the typical insured does not need.

B

An organization develops a retention plan whereby it establishes a fund to pay for losses under $5,000. Considering the three dichotomies of how risks are retained, how would this situation be described? (Text 1.5-1.6) (A) Unplanned, complete, and funded (B) Planned, partial, and funded (C) Planned, complete, and funded (D) Unplanned, partial, and funded

B

For a probability distribution, which of the following statements best describes the mean? A. It is the average of the possible outcomes weighted for their probability. B. It is the average of the observed outcomes weighted by their frequency. C. It is the midpoint value in a sequence of outcomes. D. It is the value that occurs most frequently.

B

Liability entries on an organization's balance sheet are particularly useful to the risk management professional for exploring which one of the following loss exposures? Choose one answer. A. Net income B. Obligations such as mortgage payments C. Personnel D. Loss exposures that reduce revenue

B

Personal inspections often identify loss exposures that a review of the written descriptions of the organization's operations would not reveal. Which one of the following groups of individuals within the organization are best able to identify nonobvious loss exposures to a person conducting an inspection? Choose one answer. A. Compliance review personnel B. Front-line personnel C. Risk management professionals D. Regional management

B

The risk financing goal of managing uncertainty achieves what for the organization? (Text 1.8) (A) Peace of mind for its stockholders (B) The maximization of the value of the organization by maximizing the present value of its future cash flows (C) Goodwill in the eyes of its customers (D) Attractiveness of the organization for investors

B

The structure of which of the following captives will allow for losses of one member to diminish the capital of another member? (Text 4.27-4.28) A. Protected cell company B. Rent-a-captive C. Risk retention group D. Single parent captive

B

Understanding the cumulative probability distribution will enable an insurance or risk management professional to evaluate the effect of various Choose one answer. A. Modification factors in terms of accuracy for trending purposes. B. Deductibles and policy limits on insured loss exposures. C. Types of losses and their impact on policyholder surplus. D. Types of available insurance and coverages for specific loss exposures.

B

What is the effect on coverage of the insurance policy conditions? (Text 1.37) A. It limits the insurer's payments based on persons, places, and things not covered. B. It contains steps the insured needs to take after a loss to obtain payment for the loss. C. It sets forth the circumstances under which the insurer will pay for a loss. D. It outlines who and what is covered and when the coverage applies.

B

Which of the following actions by an organization will be most likely to encourage internal stakeholders to accept an organization's ERM program? (Text 5.23) A. Adopting strategies to protect the organization's reputation and assets B. Building a spirit of cooperation among management C. Projecting the different risks and rewards at various levels of the organization D. Presenting a strong hierarchical leadership model of management

B

Which of the following expenses is NOT traditionally included in the cost of risk for an organization? (Text 1.9-1.11) (A) Transfer costs (B) Business risk expenses (C) Retained losses (D) Risk control expenses

B

Which of the following statements concerning managing the cost of risk is correct? (Text 4.5) A. Administrative expenses will be incurred when losses are retained but not when transferred. B. Risk financing expenses include transactions costs, such as commissions to brokers and fees to banks. C. Risk control expenses should not be limited to only those where the benefit will exceed the cost. D. Managing risk control and risk financing expenses means minimizing those costs to increase the organization's profitability.

B

Which one of the following best describes a probability distribution? Choose one answer. A. It is a table, chart or graph that shows how many of each type of identified loss will occur during the next twelve-month period. B. It represents probability estimates for a particular set of circumstances and the probability of each possible outcome. C. It shows the likelihood of particular future events and an estimate of the financial consequences of each predicted event. D. It predicts future events based on the frequency and severity of past events.

B

Which one of the following statements is true regarding risk management program goals? Choose one answer. A. The goal of economy of operations is that the organization should incur only moderate costs in exchange for significant benefits. B. The goal of tolerable uncertainty is to allow managers to make and implement decisions without being unduly affected by uncertainty. C. The goal of earnings stability is that the organization should strive for the highest possible level of profit in the post-loss period. D. An organization with a post-loss goal requiring a minimum level of profit tends to spend less on risk financing than an organization that does not require minimum profit.

B

_ are usually shown as frequency distributions A. Continuous probability distributions B. Discrete probability distributions

B

_ used to analyze how often something will occur A. Continuous probability distributions B. Discrete probability distributions

B

All of the following benefits are provided by a retrospective rating plan, EXCEPT: (Text 4.34-4.35) A. The insured does not pay the insurer risk charge. B. The insured that is able to reduce losses quickly will achieve premium savings. C. The insured has no more retention than with guaranteed cost insurance. D. The insured avoids most administration such as adjusting claims and making filings with the states.

C

All of the following statements concerning discrete and continuous probability distributions are correct, EXCEPT: A. Discrete probability distributions have a countable number of possible outcomes. B. Discrete probability distributions are usually shown in a table of all possible outcomes and their probability. C. Continuous probability distributions are usually shown as frequency distributions and used to analyze how often something will occur. D. Continuous probability distributions may be presented as a graph of a line or curve.

C

An organization's premises and operations liability losses have a severity distribution with a mean of $10,000 and a standard deviation of $15,000. What is the coefficient of variation for this distribution? Choose one answer. A. .60 B. .67 C. 1.5 D. 1.67

C

How are premiums set under a retrospective rating plan? (Text 4.31-4.32) A. Premiums are adjusted based on the insured's loss experience during past periods. B. Premiums are adjusted based on the loss experience of all insureds during the current period. C. Premiums are adjusted based on the insured's loss experience during the current period. D. Premiums are adjusted based on the loss experience of all insureds during past periods.

C

How does an umbrella policy differ from excess coverage? (Text 4.20) A. The umbrella policy has lower limits of coverage. B. The umbrella policy attaches to primary policies while excess coverage does not. C. The umbrella policy provides excess coverage and additional coverage not provided by underlying policies. D. All of the above.

C

If the potential losses that an organization faces are large relative to its cash flows, which retention funding measure will be most appropriate? (Text 4.10) A. Using an unfunded reserve B. Borrowing funds C. Using a funded reserve D. Current expensing of losses

C

In addition to implementing effective and efficient measures, complying with legal requirements, and promoting safety, risk control should aim to Choose one answer. A. Ensure that preventable losses do not adversely affect ongoing operations. B. Avoid or prevent all hazard risks to which the organization may be exposed. C. Minimize or eliminate significant business interruptions, whatever their cause. D. Transfer as much of the organization's hazard and business risks as possible to third parties.

C

One of the elements of risk is uncertainty. Which one of the following best describes the type of uncertainty that risk involves? Choose one answer. A. Uncertainty as to how to manage potential losses B. Uncertainty as to whether a negative outcome is possible C. Uncertainty as to the type and timing of the outcome D. Uncertainty as to whether insurance is available

C

Self-insurance plans are usually used for loss exposures with (Text 4.22) A. Low frequency, low severity B. Low frequency, high severity C. High frequency, low severity D. High frequency, high severity

C

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

C

Under The Prouty Approach of analyzing loss exposures, the four broad categories of loss frequency and the three loss severity categories are Choose one answer. A. Narrowly defined. B. Quantitative. C. Subjective. D. Diversified.

C

Warehousing a company's inventory at different locations in different cities is an example of which one of the following risk control techniques? Choose one answer. A. Diversification B. Duplication C. Separation D. Loss prevention

C

What method can be used for comparison of risk control measures to determine which is the more efficient? A. Continuous probability distributions B. Employee satisfaction studies C. Cash flow analysis D. The Prouty approach

C

Which of the following documents contains regulatory requirements for insurance companies? (Text 5.27-5.29) A. Basel II B. FERMA C. Solvency II D. AS/NZ 4360

C

With an ERM program, an organization will usually seek what outcome with regard to risk? (Text 5.24) A. Minimize risk B. Mitigate risk C. Optimize risk D. Eliminate risk

C

All of the following are advantages of a captive, EXCEPT: (Text 4.26) A. A captive can cover loss exposures that would drain cash flow from the parent. B. A captive can earn investment income on its loss reserves. C. A captive can be used to insure exposures that are difficult for a parent to insure. D. A captive can be set up without investment of capital by the parent.

D

All of the following are advantages of retention in the timing of cash flows, EXCEPT: (Text 4.11-4.12) A. Retention avoids the upfront payment such as for premium. B. Retention shortens the delay between the loss and reimbursement by the other party. C. Retention allows the organization to earn investment income on funds not paid. D. Retention enables an organization to delay payments for losses to third parties.

D

All of the following statements concerning the use of hedging for risk financing are correct, EXCEPT: (Text 4.39-4.40) A. Hedging is a risk financing measure to reduce business risks arising from price changes. B. When hedging is by derivative contracts, the organization may be exposed to basis risk. C. Unwise, speculative hedging may jeopardize an organization's risk financing plans. D. An organization that uses hedging will have reduced capacity to bear hazard risks.

D

ERM differs from traditional risk management. Which statement incorrectly states the nature of those differences? (Text 1.19) (A) ERM seeks to enable the organization to fulfill its greatest productive potential, where traditional risk management seeks to restore an organization to its pre-loss condition. (B) ERM focuses on the value of the organization, where tradition risk management focuses on the value of the accidental loss. (C) ERM focuses on the organization as a whole, hence encompassing traditional risk management within it. (D) ERM focuses on hazard risk, where traditional risk management focuses on both hazard and business risk.

D

For exposure analysis, data must meet all of the following criteria, EXCEPT: (Text 2.12-2.14) A. Relevant B. Consistent C. Organized D. Current

D

How might a risk management professional use the median in dealing with risk? A. Knowing the most common physical damage losses can influence the decision on deductibles for auto coverage. B. The best forecast of the number of workers' compensation claims for the next year is often the median of the severity distribution of claims for previous years. C. The median will be higher than the mean when the distribution of workers' compensation claims is skewed and will support additional loss control expenditure. D. The technique of finding the median by adding probabilities can be used to calculate probabilities of losses less than a given dollar amount for selection of retention levels.

D

If there is ambiguity in the language of an insurance policy, why is that language generally interpreted favorably for the insured rather than the insurer? A. The courts think the giant insurance corporations take advantage of the little guy. B. Since the insurer wrote the policy, the insurer would likely select language favorable to itself. C. Since the insured has an insurable interest, the courts construe policy language favorably for the insured. D. Because insurance is a contract of adhesion, with the insurer being totally in control of drafting the contract. Courts recognize this imbalance of bargaining position.

D

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.

D

Lucy is a commercial underwriter who is comparing two accounts to determine to which to offer coverage. The mean loss value on each account is roughly the same, and Lucy determines that the two accounts exhibit similar underwriting characteristics. All else being equal, Lucy would be best advised to select the account with the Choose one answer. A. Higher coefficient of variation. B. Lower coefficient of variation. C. Higher standard deviation. D. Lower standard deviation.

D

One method of transferring financial risk is by means of hedging. What is the main benefit of hedging? (Text 1.16-1.17) (A) A higher interest rate on the investment vehicle used (B) A lower price for the commodity to be purchased (C) Brings a measure of privacy to your yard (D) Reduction in uncertainty by providing a stable price or interest rate

D

Risk financing occurs when an organization: (Text 1.3) (A) Diversifies its asset portfolio through the purchase of stocks and bonds (B) Transfers its risk through the purchase of insurance (C) Analyzes its loss exposures (D) Acts or makes a decision that generates funds to pay losses

D

Uncertainty associated with the organization's reduction in value resulting from accidental losses is: (Text 1.18-1.20) (A) Strategic risk (B) Operational risk (C) Financial risk (D) Hazard risk

D

What is the first step for an organization that wants to integrate ERM into its strategic planning? (Text 5.12) A. Identify risks B. Analyze, evaluate, and prioritize risks C. Treat critical risks D. Develop ERM goals

D

When an organization transfers risk, it is often able to take advantage of what ancillary services? (Text 4.14) A. Claims administration B. Litigation services C. Risk assessment services D. All of the above

D

Which of the following describes an activity standard for evaluating a risk management program's performance? A. Maximum number of accidents per period B. Minimum decrease in injuries per period C. Number of accident-free periods D. Number of training sessions on safety attended

D

Which of the following is NOT a risk financing goal? (Text 1.7-1.11) (A) Paying for losses (B) Maintaining an appropriate level of liquidity (C) Managing the uncertainty of loss outcomes (D) Increasing the possibility of gain from investments

D

Which of the following is true about the risk financing goal of paying for the negative consequences of an event? (Text 1.7) (A) Negative financial consequences can be either sudden or gradual (B) It is traditionally applicable mainly to sudden events (C) An important element of why it is important to pay for losses is the capability to resume or maintain operations (D) All of the above

D

Which of the following organizations is more likely to retain a loss exposure than to transfer it? (Text 4.17-4.18) A. The organization has a low level of financial security. B. The loss exposure is outside the organization's core operations. C. The organization has avoided diversification of its loss exposures. D. The organization has reduced frequency of losses from a loss exposure.

D

Which of the following retention funding measures is the least expensive to administer, least formal, and will provide the least assurance of funds being available to pay for losses? (Text 4.10) A. Using an unfunded reserve B. Borrowing funds C. Using a funded reserve D. Current expensing of losses

D

Which of the following statements concerning pools is correct? (Text 4.31) A. There is no risk transfer among members of a pool. B. Each member keeps a record of its premium and loss account separate from other members. C. Pools are not able to offer risk control consulting and other services as do insurers. D. Members benefit from economies of scale in claims handling and purchase of reinsurance.

D

Which one of the following statements is true regarding central tendency when comparing the characteristics of probability distributions? Choose one answer. A. The central tendency is the one single outcome that occurs most frequently. B. Most probability distributions cluster around the exact center of the distribution's range of values. C. The most widely accepted ways of measuring central tendency are referred to as the average, the weighted average, and the mean. D. The measures of central tendency represent the best guess as to what the outcome will be.

D

Which two risk control measures will be selected by an organization that wants to deal most directly with reducing the severity of net income losses? A. Avoidance and diversification B. Loss prevention and separation C. Loss reduction and duplication D. Separation and duplication

D

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