Download CPCU 500 EXAM STUDY GUIDE ||2025-2026||ACTUAL EXAM QUESTIONS WITH CORRECT ANSWERS and more Exams Insurance Economics in PDF only on Docsity!
CPCU 500 EXAM STUDY GUIDE || 2025 - 2026||ACTUAL
EXAM QUESTIONS WITH CORRECT DETAILED AND
VERIFIED ANSWERS||A+ GRADE
In the context of risk, the chance of being injured while driving to and from work, loading a truck at work, moving furniture at home, or falling in an icy parking lot at the mall are all examples of A. Possibilities. B. Uncertainties. C. Probabilities. D. Losses. - Correct Answer-A. Possibilities. The statement, "There is a five percent chance that John will be injured in an automobile accident while driving to work tomorrow," is an example of A. Quantifying risk. B. Verifying risk. C. Quantifying loss exposures. D. Identifying hazards. - Correct Answer-A. Quantifying risk. Which one of the following is measurable and quantifies risk? A. Probability B. Possibility C. Uncertainty D. Feasibility - Correct Answer-A. Probability One of the elements of risk is uncertainty. Which one of the following best describes the uncertainty that risk involves? 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 an outcome D. Uncertainty as to whether insurance is available - Correct Answer-C. Uncertainty as to the type and timing of an outcome Hardware Store has been able to control its prices and inventory since it has no competitors. A new highway currently being constructed is going to allow increased competition for Hardware Store. According to the quadrants of risk, this risk of increased competition falls into the category of A. Strategic risk. B. Hazard risk. C. Operational risk. D. Financial risk. - Correct Answer-A. Strategic risk. Company G is a manufacturer of high profile golf equipment. The risk management professional for Company G is concerned about loss of business related to product design. Failing to respond to changing customer demand and preferences in the design of golf clubs could cost Company G significant market share. Categorized according to the quadrants of risk, this exposure to loss would be classified as a(n) A. Strategic risk. B. Financial risk. C. Operational risk. D. Hazard risk. - Correct Answer-A. Strategic risk. 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? A. Donating his inheritance to charity is a pure risk; there is no uncertainty that the money will be gone and George will have no chance of profit. B. Buying a boat is a nondiversifiable risk because George can only afford to purchase a single yacht.
A. Traditional organizational culture with entrenched risk silos. B. Lack of required skills to effectively implement an ERM program. C. Lack of vision by the management team that leads to under-performance of the ERM plan and early termination. D. Opposition from stakeholders—employees, stockholders, customers, and suppliers. - Correct Answer-A. Traditional organizational culture with entrenched risk silos. The consensus process by which the veracity of data is confirmed and verified is known as Select one: A. Telematics. B. Machine learning. C. The Internet of Things. D. Mining. - Correct Answer-D. Mining. Which one of the following is a virtual ledger of data that has been verified, timestamped, encrypted, and protected against tampering? Select one: A. Artificial intelligence B. The Internet of Things C. Closed-loop system D. Blockchain - Correct Answer-D. Blockchain Which one of the following is the network through which sensors and other smart products capture and transmit data? Select one: A. Blockchain B. Cloud
C. Artificial intelligence D. Internet of Things - Correct Answer-D. Internet of Things Insurers and risk managers can use the large volumes of data collected and organized through telematics to help improve results for which one of the following types of insurance? Select one: A. Health B. Workers compensation C. Automobile D. Property - Correct Answer-C. Automobile 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 Select one: A. Cost of implementing and administering risk management. B. Cost of measures to prevent or reduce the size of potential losses. C. Cost of residual uncertainty. D. Cost of losses not reimbursed by insurance. - Correct Answer-C. Cost of residual uncertainty. The two benefits of risk management affecting individuals, organizations, and society are: it preserves financial resources by reducing expected losses and it Select one: A. Reduces the residual uncertainty associated with risk. B. Increases productivity within the economy and improves overall standard of living. C. Increases the attractiveness to investors. D. Improves the allocation of productive resources. - Correct Answer-A. Reduces the residual uncertainty associated with risk.
Select one: A. Compliance. B. Tolerable uncertainty. C. Social responsibility. D. Value at risk. - Correct Answer-B. Tolerable uncertainty. The second step in the risk management process is analyzing loss exposures. Which one of the following is true regarding this step? Select one: A. Loss exposures are analyzed based on loss frequency, loss severity, total dollar losses, and timing in this step. B. Loss exposures that could interfere with the achievement of the organization's goals are identified in this step. C. A weakness of loss exposure analysis is that it is useful only for those types of losses that an organization has suffered in the past. D. A major strength of loss exposure analysis is that the process is generally inexpensive. - Correct Answer-A. Loss exposures are analyzed based on loss frequency, loss severity, total dollar losses, and timing in this step. Which one of the following is the first step in the risk management process? Select one: A. Examine the feasibility of risk management techniques B. Monitor results and revise the risk management program C. Identify loss exposures D. Analyze loss exposures - Correct Answer-C. Identify loss exposures 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? Select one:
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. - Correct Answer-B. Compare actual results with the established performance standards. 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 Select one: A. Monitor the results. B. Revise the risk management program. C. Implement the selected techniques. D. Decide on risk financing techniques. - Correct Answer-C. Implement the selected techniques. Risk is a term that is regularly used and that is generally understood in context. As used in this discussion, which one of the following is one of the two elements within the definition of risk? Select one: A. Uncertainty of outcome B. Likelihood of injury or damage to property C. Probability of financial loss D. Opportunity for profit - Correct Answer-A. Uncertainty of outcome Probabilities are stated as a decimal figure, a percentage, or a Select one: A. Stated constant.
D. Speculative risk. - Correct Answer-B. Subjective risk. The focus of risk quadrants is different from the focus of risk classifications. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on Select one: A. Subjective and objective risks. B. The source of risk and who has traditionally managed it. C. Pure and speculative risks. D. The determination of whether the risk is diversifiable. - Correct Answer-B. The source of risk and who has traditionally managed it. One approach to categorizing risks involves dividing risks into risk quadrants. The risks categorized as hazard risks are Select one: A. Traditionally handled by the chief financial officer. B. Speculative risks that fall outside the operational risk category. C. Fundamental to an organization's existence and business plans. D. Traditionally managed by risk management professionals. - Correct Answer-D. Traditionally managed by risk management professionals. Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification? Select one: A. Private insurance tends to concentrate on nondiversifiable risks; government insurance is often suitable for diversifiable risks. B. The distinction between diversifiable and nondiversifiable risks is clear; risks cannot fall under both classifications simultaneously. C. Inflation, unemployment, and natural disasters, such as hurricanes, are examples of diversifiable risk.
D. Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. - Correct Answer-D. Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. Conrad Sales Company's vehicles are equipped with a device that allows them to locate each vehicle for tracking purposes. If a vehicle is stolen, the tracking devices can be used to recover the vehicle more quickly. Conrad Sales Company is using the risk management technique of Select one: A. Transfer. B. Duplication. C. Loss reduction. D. Loss prevention. - Correct Answer-C. Loss reduction. Three main theoretical concepts explain why ERM works. Which one of the following correctly lists those three concepts? Select one: A. Objective setting, risk response, and monitoring B. Internal environment, event identification, and control activities C. Interdependency, correlation, and portfolio theory D. Risk quantification, silo theory, and statistical correlation - Correct Answer-C. Interdependency, correlation, and portfolio theory Which one of the following is usually the single largest impediment to successful implementation of enterprise risk management (ERM)? Select one: A. The traditional organizational culture B. The financial expense C. The legal and regulatory requirements D. The risk management information system - Correct Answer-A. The traditional organizational culture
A. The Internet of Things. B. Mining. C. Telematics. D. Machine learning. - Correct Answer-B. Mining. Which one of the following costs is part of the overall financial consequences of risk? Select one: A. The cost of benchmarking surveys B. The cost of purchasing an asset C. The cost of the value lost due to events that caused a loss D. The cost of losses reimbursed by insurance - Correct Answer-C. The cost of the value lost due to events that caused a loss As part of its risk management program, a vending company installed a new top of the line security system with an expectation of fewer thefts and Select one: A. Higher expected losses. B. Less residual uncertainty. C. Increased anxiety. D. Increased residual uncertainty. - Correct Answer-B. Less residual uncertainty. 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 Select one: A. $7.0 million B. $10.0 million C. $11.5 million D. $71.5 million - Correct Answer-C. $11.5 million (The cost of risk of opening the new facility is $11.5 million, calculated by adding $6 million of safety system upgrades + $1. million of insurance premiums + $3 million of retained losses + $1 million of risk management budget at the site) 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? Select one: A. Social responsibility and earnings stability B. Legality and profitability C. Tolerable uncertainty and earnings stability D. Economy of risk management operations - Correct Answer-C. Tolerable uncertainty and earnings stability Which one of the following is essential to an effective risk management program? Select one: A. Increased cost of risk B. Reduced waste of resources C. Support from the community as a whole D. Support of the organization's senior management - Correct Answer-D. Support of the organization's senior management
Which one of the following steps required to monitor and revise the risk management program refers to a proper standard that includes specifications for how results or performance will be measured, such as target activity levels or results? Select one: A. Correct substandard performance or revise standards that prove to be unrealistic B. Establish standards of acceptable performance C. Compare actual results with standards D. Evaluate standards that have been substantially exceeded - Correct Answer-C. Compare actual results with standards Which one of the following is true regarding risk control techniques? Select one: A. They are usually used in isolation. B. They minimize the frequency or severity of losses or make losses more predictable. C. They generate funds to finance losses that cannot be prevented. D. They ensure that the estimated frequency and severity of loss remain constant. - Correct Answer-B. They minimize the frequency or severity of losses or make losses more predictable. Which one of the following is correct with respect to the potential financial consequences of a property loss? Select one: A. When property is used to secure a loan, only the lender suffers financial consequences if that property is destroyed. B. Bailees need to consider not only their owned property loss exposures, but also the exposures of property held for others. C. Consumers or resellers of property do not suffer a financial loss unless they actually own property when it is damaged. D. When a mortgaged property is destroyed, the mortgagor's loss is limited to the outstanding balance of the loan. - Correct Answer-B. Bailees need to consider not only their owned property loss exposures, but also the exposures of property held for others.
A secured lender (secured creditor) Select one: A. Acquires conditional rights to property, such as the right to repossess it if loan payments are not made. B. Holds property of others to perform work on it. C. Has a direct ownership interest in the property. D. Purchases insurance to cover the borrower's loss of use of the property should the borrower default on the loan. - Correct Answer-A. Acquires conditional rights to property, such as the right to repossess it if loan payments are not made. For insurance purposes, money and securities are separate from other types of contents because Select one: A. The insurance industry considers them uninsurable. B. They are not susceptible to the same perils as other property. C. The burden of proof for a loss is on the insurer. D. They are highly susceptible to loss by theft. - Correct Answer-D. They are highly susceptible to loss by theft. When property is used to secure a loan, which of the following is exposed to loss? Select one: A. Neither the property owner nor the secured lender B. The property owner only C. The property owner and the secured lender D. The secured lender only - Correct Answer-C. The property owner and the secured lender Angelina borrows money from the bank to purchase a house. The house serves as security for the loan. In this transaction, Angelina is the
trenching machine passes by, a member of the community steps on the trenched area, sinks in, and breaks his leg. This is an example of a liability loss exposure arising out of Select one: A. Premises. B. Products. C. Completed operations. D. Mobile equipment. - Correct Answer-C. Completed operations. Products liability loss exposures arise out of injuries or damage that result from an organization's Select one: A. Operations away from premises. B. Manufacturing operations. C. Types of bailments. D. Defective product. - Correct Answer-D. Defective product. Anyone who owns or occupies property has a Select one: A. Pollution liability loss exposure. B. Products liability loss exposure. C. Professional liability loss exposure. D. Premises liability loss exposure. - Correct Answer-D. Premises liability loss exposure. Dr. Donna Jenkins is a research chemist for PharmaCon, a large pharmaceutical company. Last year, she was responsible for 12 of the 14 patents awarded to PharmaCon. Clearly, the future prospects of the company would be damaged if Dr. Jenkins died or became severely disabled. In risk management parlance, Dr. Jenkins is considered Select one:
A. An officer. B. A protected employee. C. A director. D. A key employee. - Correct Answer-D. A key employee. The death of a shareholder in a close corporation is often a significant event for the corporation for which one of the following reasons? Select one: A. Shareholders in a close corporation also serve on the board of directors resulting in a disparity of shareholder votes. B. The death or disability of one of the shareholders generally results in payment of dividends to the remaining shareholders. C. Ownership in a close corporation is typically concentrated in just the few major shareholders, most of whom are also managers. D. Key shareholders are paid high salaries and are difficult to replace. - Correct Answer- C. Ownership in a close corporation is typically concentrated in just the few major shareholders, most of whom are also managers. A company turnover rate well above company and industry averages could be a sign of Select one: A. Personnel problems that need to be addressed. B. Claims-consciousness. C. Financial problems that need to be addressed. D. Employee slacking. - Correct Answer-A. Personnel problems that need to be addressed. Other than some type of merger, layoff, or organizational change, which one of the following is an example of a situation where an entire group of employees might leave an organization? Select one: A. When an organization offers excessive compensation
