CPCU 500 Practice

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?

A. Leading indicator

Which one of the following statements is true regarding operational risk? A. Operational risk is integrated in every activity of an organization. B. Financial institutions and their regulators typically define operational risk to include market risk and credit risk. C. Operational risk is best managed during the course of business by an organization's front-line managers. D. Most current methods of managing operational risk are informal.

A. Operational risk is integrated in every activity of an organization.

Magruder Company would like to estimate the number of workers compensation claims to expect next year. Magruder's risk manager ran a regression analysis in which the number of workers compensation claims was the dependent variable and the number of payroll hours worked (in thousands) was the independent variable. The y-intercept from the regression was 3.8. The slope coefficient was 1.4. The risk manager believes that next year Magruder workers will work 80,000 payroll hours. Based on this information, approximately how many workers compensation claims should the risk manager expect next year?

116 y = 1.4 (80) + 3.8

Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures? A. A common function that insurance provides is a spreading of risk across a large number of similar exposure units within the same period. B. Intertemporal risk transfer, the spreading of risk through time, requires a large number of similar exposure units. C. One requirement of the law of large numbers is that past events occur under different circumstances in the future. D. Loss exposures such as homes and automobiles generally will not meet the ideally insurable requirement that the exposure be of a large number of similar exposure units.

A. A common function that insurance provides is a spreading of risk across a large number of similar exposure units within the same period.

Which one of the following is an example of exploratory data analysis? A. Correlation matrix B. Association rule learning C. Classification trees D. Clustering

A. Correlation matrix

Which one of the following provides a measure of the maximum potential damage associated with an occurrence? A. Exposure B. Duration C. Underwriting risk D. Maximum probable loss

A. Exposure

This earthquake-resistant construction relies on the resilience of steel or specially designed reinforced concrete to absorb energy, undergo considerable distortion, and return to its original shape. Which one of the following describes this type of design? A. Frame action design B. Modified earthquake design C. Box action design

A. Frame action design

Which one of the following statements is true regarding the nature of probability? A. Probabilities deduced solely from historical data may change as new data are discovered or the environment changes. B. The type of probability most commonly used by risk management professionals is theoretical probability. C. Empirical probability distributions are constant as long as the physical conditions that generate them remain unchanged. D. Theoretical probabilities are only estimates whose accuracy depends on the size and representative nature of the samples considered.

A. Probabilities deduced solely from historical data may change as new data are discovered or the environment changes.

A source of a rapidly growing quantity of external data is

A. The Internet of Things.

A company's management team is preparing to conduct a SWOT analysis as part of its strategic management process. Which one of the following questions can the management team expect to answer as a result of the SWOT analysis?

A. Will this organization's current business strategies still allow it to achieve its goals, or is a change required?

An excess liability insurance policy that covers a claim in excess of the underlying limits only if the loss is covered by the underlying policy is called A. A true excess policy. B. A following-form excess policy. C. A layered policy. D. An umbrella policy.

B. A following-form excess policy.

The board of directors of Insurance Company wants assurance that the company's recently-instituted "commitment to risk management" has been communicated to and accepted by all company employees. Which one of the following would be the best method to determine if employees had been informed of the commitment to risk management and had accepted it?

B. Ask the internal audit department to administer a risk management questionnaire to employees.

Which one of the following is a specific duty of a fiduciary supported by the Employee Retirement Income Security Act? A. Be a beneficiary of plan B. Carry out duties with the diligence of a prudent person C. Administer the investment plan assets D. Obtain Certified Public Accountant-level training

B. Carry out duties with the diligence of a prudent person

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?

B. Cyber risk

Which one of the following statements is true if earnings at risk are $200,000 with 90% confidence? A. Earnings at risk are projected to be $180,000. B. Earnings at risk are projected to be less than $200,000 10% of the time. C. Earnings at risk are projected to be $200,000 90% of the time. D. Earnings at risk are projected to be greater than $200,000 10% of the time.

B. Earnings at risk are projected to be less than $200,000 10% of the time.

The physical stress on joints, bones, muscles, and nerves and the stress created by such factors as lighting, glare, and noise constitute:

B. Ergonomic stress.

The strategic management process includes five interdependent stages. Which one of the following stages requires all parts of the organization to play a role?

B. Implementing the strategies

If an insurer wants to determine the numerical value for a known target variable, it is most likely to use A. A classification tree. B. Regression. C. Association rule learning. D. Cluster analysis.

B. Regression

Which one of the following statements is true regarding sources of risk affecting property exposures? A. Physical risks to property can generally be broken into two categories: natural and mechanical. B. Risk control techniques can usually manage the likelihood and consequences of human risk sources to some extent. C. Deliberate acts of individuals or groups are generally considered natural risk sources. D. Risk management has little, if any, effect on controlling the consequences of events caused by natural sources.

B. Risk control techniques can usually manage the likelihood and consequences of human risk sources to some extent.

Regarding diversifiable and nondiversifiable risk, which one of the following statements is accurate? A. An example of a diversifiable risk is inflation. B. Systemic risks are generally nondiversifiable. C. An example of a nondiversifiable risk is a fire. D. Risks must be either diversifiable or nondiversifiable.

B. Systemic risks are generally nondiversifiable.

Management of LMN Insurance Company is considering investing in the Stability-Growth Mutual Fund; however they are concerned about the volatility of the investment. The fund's manager said that on any given day, there is a 5% probability of losing more than 3% of the investment's worth. The statistic quoted by the fund manager is:

B. Value-at-risk.

The descriptive approach is applied A. Repeatedly to provide information for data-driven decision making. B. When an insurer or risk manager has a specific problem. C. When an insurer or risk manager is deciding what type of computer technology to purchase. D. To process information received from the Internet of Things.

B. When an insurer or risk manager has a specific problem.

Predictive technique

Brendan has decided to use a structured process that incorporates expert opinions into the probability estimations

What percentage of diamond points are likely to wear out before 80 days?

C. 15.87%

Assume that the expected safe life of a heating element for a particular type of furnace is 4,000 hours with a standard deviation of 200 hours, and that the expected safe life conforms to a normal distribution. If the maintenance schedule requires that the element be replaced after 4,000 hours, which one of the following represents the chance that the heating element will become unsafe before being replaced? A. 30% because of the effect of the standard deviation applied to the 4,000 hour mean B. 40% because there is a 10% tolerance allowance C. 50% because 50% of the normal distribution is below the 4,000 hour mean D. 60% because there is a 10% tolerance allowance

C. 50% because 50% of the normal distribution is below the 4,000 hour mean

Risk management professionals must collaborate with data analysts during which two steps of the risk management process?

C. Analyze risks and monitor risk treatments

Under a large deductible plan, the amount that the insurer incurs to adjust losses A. Is prorated between the insured and the insurer based on the size of the loss. B. Is outside the deductible. C. Can be inside or outside the deductible. D. Is inside, or included, in the deductible.

C. Can be inside or outside the deductible.

One example of a noninsurance risk financing transfer is a A. Waiver. B. Guaranty agreement. C. Hold-harmless agreement. D. Disclaimer of warranties.

C. Hold-harmless agreement.

Which one of the following statements about the balance sheet is correct? A. The balance sheet must always balance, but an exception is that the balance sheet will not balance if net worth is a negative number. B. The balance sheet contains important financial information about net worth and assets, both which indicate the source of an organization's funding. C. Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets. D. Change in asset and liability valuation from historical cost to fair value has no effect on the value of shareholders' equity.

C. Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets.

Which one of the following statements is true with regard to preventive analytics? A. Preventative analytics uses human assets to analyze data collected by smart products. B. Preventive analytics involves data collection at discrete points in time, such as 10 AM or 4 PM each day, and comparison of these values at discrete points in time. C. Preventive analytics uses smart products and data analytics to identify root loss causes and their implications. D. Preventive analytics is backward-looking, basing corrective prescriptions on the organization's past loss history.

C. Preventive analytics uses smart products and data analytics to identify root loss causes and their implications.

Which one of the following statements regarding probability is correct? A. Risk management professionals use theoretical probabilities because they are generally available for and applicable to claim analysis. B. The probability of an event that is absolutely certain is 0. C. Probabilities associated with events such as coin tosses can be developed from theoretical considerations and are unchanging. D. The accuracy of theoretical probabilities depends on the size and representative nature of the samples being studied.

C. Probabilities associated with events such as coin tosses can be developed from theoretical considerations and are unchanging.

Root cause analysis (RCA) encompasses a variety of tools, philosophies, and processes. There are several broadly defined RCA approaches, according to their basic approach or field of origin. Which one of the following approaches to RCA evolved from quality control procedures for industrial manufacturing?

C. Production-based RCA

Hank has determined the expected number of workers compensations claims in a given year. Hank next calculates the standard deviation of potential outcomes. Calculating the standard deviation A. Allows Hank to estimate accurate claim reserves for future workers compensation claims. B. Allows Hank to accurately predict the mean of the distribution. C. Provides a measure of how sure Hank can be in his estimate of claims. D. Enables the organization to make better use of its resources.

C. Provides a measure of how sure Hank can be in his estimate of claims.

Owners' equity represents the capital contributed by an organization's owners plus the organization's:

C. Retained earnings.

Which one of the following risk control techniques might actually increase loss frequency? A. Loss prevention B. Diversification C. Separation D. Loss reduction

C. Separation

Murray Trucking is interested in evaluating which risk factors are most likely to lead to the most costly accidents. They are evaluating risk factors such as speed, weather conditions, driver experience, distance traveled, and gross vehicle weight. Which one of the following statistical measurements would be useful for the risk manager when calculating the probability of the different risk factors causing severe accidents? A. Inverse covariance B. Monte Carlo simulation C. Variance D. Telematics

C. Variance

An insurer is beginning to write business in a new state. The claim manager, Carla, wants to know how many new claim representatives to hire to accommodate the additional volume of claims. Based on the marketing department's estimate and industry data, Carla has determined the mean number of new claims to be 2,000, with a standard deviation of 1,000 in a normal distribution. If a claim representative can typically adjust 600 claims per year, and Carla wants at least 80 percent certainty that she has enough representatives, which one of the following represents how many representatives she will need to hire?

Carla's 80 percent certainty will fit within one standard deviation above the mean since 84.13% of all outcomes fall below one standard deviation above the mean. The number of new claims will then be 3,000, and since one claim manager can adjust 600 claims in a year, 5 additional representatives can handle the volume (3,000/600)

Leasing is a useful noninsurance risk control transfer because:

Certain loss exposures accompany property ownership but do not accompany its use or occupancy.

Employers face a number of potential loss exposures due to federal legislation and state laws. Of the various types of Employment Practices Liability (EPL) claims, which one of the following is a major type of EPL claim? A. An exempt employment claim B. An overtime pay claim C. A retirement claim D. A retaliation claim

D. A retaliation claim

Directors and officers are considered to have met their duty of care if they have met two different standards. Which one of the following is one of these standards? A. Maintaining and enforcing the corporate charter and bylaws B. Approve important financial matters and corporate reports C. Be involved in establishing the goals and policies of the corporation D. Act in a manner believed to be in the corporation's best interests

D. Act in a manner believed to be in the corporation's best interests

Insurance Company monitors key indicators of underwriting effectiveness. Some indicators they monitor include: percentage of business quoted that was written, application processing time, premium volume handled by underwriters, skill level of underwriters, and benchmarking between different underwriting offices. The indicators of underwriting performance Insurance Company uses are called: A. System indicators. B. Exposure indicators. C. Process indicators. D. Control indicators.

D. Control indicators.

An important liquidity measure for a business is its working capital. Working capital is equal to:

D. Current assets minus current liabilities.

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?

D. Current ratio

One category of operational risk includes procedures and practices organizations use to conduct their business activities. This category is A. Business complexity risk. B. Technological risk. C. Systems risk D. Process risk.

D. Process risk.

Julian was having a conversation with Tania, one of his employees. At one point, Julian said, "What I hear you say is that you would like to take on more responsibility. Is that correct?" Which one of the following elements of active listening was Julian illustrating? A. Collaboration B. Suspension of judgement C. Attention D. Response

D. Response

The level of confidence an organization places in the organization's risk management culture, practices, and procedures is called

D. Risk assurance.

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?

D. Risk tolerance

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: A. Nondiversifiable risk. B. Objective risk. C. Speculative risk. D. Subjective risk.

D. Subjective risk.

Statutory limitations on hold-harmless agreements vary in the A. Cost or compensation associated with the agreement. B. Allowable complexity of the agreement. C. Length of time that such transfers can be effective. D. Types of noninsurance transfers to which the statutes apply.

D. Types of noninsurance transfers to which the statutes apply.

Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the policy period. This provision supports the principle that insurable loss exposures must ideally be:

Definite

Creative Catering has a 15 year old vehicle that was originally built to prepare and serve sandwiches and drinks at various outdoor functions such as car shows, sporting events, etc. The vehicle is of low value but it generates approximately $100,000 a year in sales. The risk management professional will primarily be concerned about its:

Economic value

An organization can use securitization to exchange:

Income-producing assets for cash.

An organization must meet the standard of care that it owes to others in order to ensure that:

Legal obligations are satisfied.

HVAC Supply Company will be exposed to which one of the following types of strategic risk?

Marketing risk

In order to be useful, data should be

Structured or unstructured.

EaR is mainly used to:

determine the amount by which the net income (or earnings) of an investment may shift as a result of changes in market conditions, such as interest rates going up or down. Determining EaR entails modeling the influence of factors such as changes in interest rates; sales; production costs; and the prices of products, commodities, and components used in production

VaR is typically used to:

determine the probability of loss on an investment portfolio over a certain, usually short, time period. VaR measures the probability of incurring a loss in value that exceeds a threshold level. It is typically characterized by measuring over a short time period and a low probability.