CPCU 500 - Final Review
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
A control risk self-assessment
Which one of the following statements about root cause analysis (RCA) is true?
A root cause must produce effective recommendations for prevention of future accidents.
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
A systems risk.
Insurance and risk management professionals use measures of dispersion of the distributions of potential outcomes to gain a better understanding of loss exposures being analyzed. Which one of the following is true regarding the standard deviation of a distribution?
It indicates how widely dispersed the values in a distribution are.
Which one of the following is an analysis that dissects a repetitive task to determine potential hazards if each action is not performed?
Job safety analysis
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
Mechanical sensors
Technological advancements have affected all risk treatment techniques. Which two techniques have been impacted most?
Modification and transfer
The broad form of the hold-harmless agreement attempts to
Place all financial consequences of potential losses on the transferee.
In order to achieve collaboration, group leaders must
Remain focused on preventing stakeholders from straying from the common goal.
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
Residual market loading.
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?
Retaliation claim
A conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable is
Risk control
Directors (and sometimes officers) owe a duty of loyalty to the
Stockholders who elect them
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?
.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.
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?
Closeness
A risk manager and safety engineer need to consider which one of the following interdependent elements when evaluating the premises condition?
Construction, occupancy, protection, and external exposures
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?
Correlation
Jeremy purchased some long-term corporate bonds when he retired. He plans to use the periodic interest payments from the bonds to supplement his other sources of retirement income. However, some of the companies that issued the bonds that Jeremy purchased may become insolvent and unable to make periodic interest payments. This risk that Jeremy took when he invested in the corporate bonds is called
Credit risk
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?
Current ratio
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?
Cyber risk
A disadvantage of value-at-risk (VaR) is that VaR
Does not accurately measure the extent to which a loss might exceed the threshold.
Which one of the following statements is true if earnings at risk are $200,000 with 90% confidence?
Earnings at risk are projected to be less than $200,000 10% of the time
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
Energy transfer theory.
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
Functional replacement cost.
Which one of the following team approaches to risk identification is primarily used to design complex, scientific systems?
HAZOP is primarily used to design complex, scientific systems.
The use of risk quadrants to identify and categorize risk provides a framework for
Holistic risk identification.
The strategic management process includes five interdependent stages. Which one of the following stages requires all parts of the organization to play a role?
Implementing the strategies
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?
Inadequate driver training
For insurers to utilize pooling most effectively, the insured exposure units need to be
Independent.
Information used as a basis for measuring the significance of a risk is called
Information used as a basis for measuring the significance of a risk is called risk criteria.
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?
Intermediate form
Which one of the following is the inherent weakness of root cause analysis (RCA)?
It can only look backward.
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?
Leading indicator
Which one of the following indicates the values of the target variable on a classification tree?
Leaf nodes
"The contractor agrees to indemnify and hold harmless the owner against claims, damages, bodily injury, or property damage arising out of the contractor's work and caused by any act of omission of the contractor, his agents, and his employees." This is an example of which one of the following forms of a hold-harmless agreement?
Limited form
Which one of the following statements is correct regarding formulating an organization's long-term strategies?
Long-term strategies to improve performance and/or create a competitive advantage, are based on the organization's goals and analysis of internal and external environments
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
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?
Loss reduction
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?
Marketing risk
Which one of the following statements is true regarding operational risk?
Operational risk is integrated in every activity of an organization
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?
PESTLE analysis examines the political, economic, sociological, technological, legal, and environmental aspects of the external environment.
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?
Pathos
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
Price risk
Which one of the following is a legal and regulatory concern when personal information is obtained from public sources?
Privacy
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?
Risk tolerance
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
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?
Separation
Which one of the following statements best describes the shareholders' equity section of the balance sheet?
Shareholders' equity is negative when liabilities exceed assets
Which one of the following is the most intangible and abstract of the four risk quadrants?
Strategic risk
In order to be useful, data should be
Structured or unstructured.
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.
Regarding diversifiable and nondiversifiable risk, which one of the following statements is accurate?
Systemic risks are generally nondiversifiable
A source of a rapidly growing quantity of external data is
The Internet of Things
Which one of the following statements about risk management monitoring and reporting is true?
The most important characteristic of a risk report format is that it is useful to the user.
Which one of the following concerns should an organization consider when using a Special Purpose Vehicle (SPV) to generate cash from income-producing assets?
The organization must maintain a high level of disclosure regarding the SPV's assets.
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?
The rental property presents both pure and speculative risk; property values may increase, and the building could burn down.
Which one of the following statements is true regarding the Life Safety Code®?
The standards of the Life Safety Code® are incorporated into the statutes and ordinances of most United States localities.
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
The use of telematics to reduce operational risk.
Which one of the following best explains how most smart products potentially improve risk management?
They generate big data to which advanced analytics can be applied
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?
Tolerable uncertainty and earnings stability
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?
Treating risks requires the risk professional to carefully balance his or her own experience and that of the subject matter experts.
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
Vandalism.
Which one of the following is a characteristic that differentiates big data from traditional data?
Velocity
Which one of the following statements is correct regarding the challenges of delivering messages to internal and external stakeholders?
When addressing individuals of different status levels, it is best to ask for ideas from lower-level persons before turning to those of higher standing
In which one of the following situations should managers and supervisors practice using "I" messages instead of "you" messages?
When they are identifying a problem with an employee's work
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
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.
ranton 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?
15.87%
Vandenberg Company retains workers compensation medical expenses. The risk manager ran a regression using workers compensation medical costs as the dependent variable and company payroll (in actual dollars) as the independent variable. Results of the regression were: y = .098 x + 5.20 Next year's payroll is expected to be $3,750,000. As medical costs continue to rise at a rate higher than inflation, the risk manager would like to adjust the expected medical costs upward by 10%. Based on this information, what are the expected workers compensation medical costs for next year?
Based on this information, the expected workers compensation medical costs for next year are $404,256. y = mx + b, where b = y-intercept and m = slope. Payroll is the independent variable x axis and WC medical costs are the dependent variable y axis. y = .098 (3,750,000) + 5.20, y = 367,505.20; 367,505.20 × 1.10 = 404,255.72.
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?
Box action design
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
DIY's standing order to have goods shipped is an example of a smart contract.
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?
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?
Determining a maintenance schedule for equipment that could become dangerous if it were to fail
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?
Discrete
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?
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.