CPCU 500 Ch 1 practice questions

After identifying and analyzing loss exposures and evaluating and selecting the appropriate risk management techniques, the next step in the risk management process is to

Implement the selected techniques.

Which one of the following is a main theoretical concept that explains how traditional risk management works?

Silo approach

Which one of the following is both a pre-loss and a post-loss risk management goal for many organizations?

Social responsibility

Regarding diversifiable and nondiversifiable risk, which one of the following statements is accurate?

Systemic risks are generally nondiversifiable.

To understand risk, one needs to know the probability of an outcome or event occurring. Which one of the following statements is correct with respect to probability?

It can be used to decide which activities to undertake

Which one of the following describes how an effective risk management program should support an organization's pre-loss operational goals?

It should help ensure that the organization's legal obligations are satisfied.

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

Moral hazard

Driving carelessly or failing to lock an unattended building are examples of (hazard)

Morale hazard.

Insurance deals primarily with

Pure risks

Three main theoretical concepts explain how enterprise risk management (ERM) works. One theoretical concept considers not only the combination of individual risks but also their interactions. This theoretical concept is

Quantifying risk

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

$11.5 million

Which one of the following is an element of a loss exposure?

A cause of loss

An example of an intangible asset that an individual may possess is

A unique skill set.

Which one of the following statements regarding monitoring the results of a risk management program is true?

Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program.

A risk management plan that considers all of the risks that an organization faces, including operational, financial, and strategic risks, is called

An enterprise risk management plan

Two steps of the risk management process, when combined, constitute the process of assessing loss exposures. For this reason, they are probably the two most important steps in the process. These two steps are identifying loss exposures and

Analyzing loss exposures.

Carol has worked as a payroll clerk for a small organization for 20 years. Over the years she received only two small salary increases and began to embezzle funds from the company since she felt she was not adequately compensated for her job efforts. In terms of the quadrants of risk, Carol's theft risk can be classified as

Both a hazard risk and an operational risk.

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?

Continuity of operations

Which one of the following is typically a post-loss risk management goal?

Continuity of operations

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

Cost of residual uncertainty

An organization generally should not incur substantial costs in exchange for slight benefits under its risk management program. By comparing its costs of risk management with other similar organizations, an organization can measure its pre-loss goal of

Economy of operations.

Which one of the following statements is accurate regarding pure and speculative risks?

Every business venture involves speculative risks.

A net income loss exposure is a condition that presents the possibility of loss caused by a reduction in net income. In a given time period, net income equals revenue minus

Expenses and income taxes

Every loss exposure has which one of the following elements?

Financial consequences of loss

Probabilities are stated as a decimal figure, a percentage, or a

Fraction

In remodeling the primary office location, Phil, who is a partner in his family's construction business, found asbestos in the attic of the building. He is concerned not only about the current tear-out exposure but is also aware that asbestos may have resulted in unidentified harm. In the "quadrants of risk," Phil's concern about the asbestos most likely falls into which one of the following quadrants of risk?

Hazard risks

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?

Legality

Another term for cause of loss is

Peril

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

Possibilities

For insurance and traditional risk management purposes, loss exposures are typically divided into four types. Which one of the following lists those four types?

Property, liability, personnel, and net income

Which one of the following statements is true regarding risk management efforts on the part of individuals, organizations, and society in general?

Risk management makes those who own or run an organization more willing to undertake risky activities.

Which one of the following is a type of risk that enterprise risk management (ERM) would treat but that traditional risk management would not?

Risk of changes in commodity prices, such as fuel or raw materials

Billy owns a beach front cottage which has become his primary residence. Billy's primary concern is that his home will be hit by a hurricane and badly damaged or even destroyed. For Billy, this hurricane risk is a

Subjective Risk

Jane always drives to visit her children who live one thousand miles away. She enjoys driving and feels safer in a vehicle than on an airplane because she feels she has more control of her fate. This driving versus flying decision is an example of

Subjective Risk

Risk involves the possibility of a negative outcome. Possibility means

That an outcome may or may not occur

Which one of the following costs is part of the overall financial consequences of risk?

The cost of the value lost due to events that caused a loss

Sally and her husband Bill own a saddle shop that has been in Sally's family for generations. Because of the sentimental value of the shop, they have invested a great deal in loss-prevention devices and safety features to ensure the survival of the business. This tendency to over-invest in loss-prevention measures creates the risk that

The financial value of the saddle shop is not being maximized.

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

The goal of tolerable uncertainty is to allow managers to make and implement decisions without being unduly affected by uncertainty.

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?

The new production machine

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

The portfolio theory

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

The risk management techniques selected by for-profit organizations should be both effective in meeting the organizations' goals and economical.

Which one of the following is usually the single largest impediment to successful implementation of enterprise risk management (ERM)?

The traditional organizational culture

Which one of the following financial consequences of loss can be established with a high degree of certainty fairly soon after the loss occurs?

The value of a building that has been damaged by fire

Which one of the following is a risk financing technique?

Transfer

One of the elements of risk is uncertainty. Which one of the following best describes the type of uncertainty that risk involves?

Uncertainty as to the type and timing of the outcome

Which one of the following is true regarding organizational post-loss goals?

With a post-loss goal of profitability, senior management may establish a minimum amount of profit that no loss can be allowed to reduce.

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?

compare actual results with the established performance standards.