CPCU 500

tressinblack's version from 2015-09-12 02:31

Foundations of Risk Management and Insurance (1st ed.): one of several courses in the Chartered Property Casualty Underwriter (CPCU®) designation program

Assignment 1: Introduction to Risk Management

Question Answer
ProbabilityThe likelihood that an outcome or event will occur.
Pure riskA chance of loss or no loss, but no chance of gain.
Speculative riskA chance of loss, no loss, or gain.
Credit riskThe risk that customers or other creditors will fail to make promised payments as they come due.
Subjective riskThe perceived amount of risk based on an individual's or organization's opinion.
Objective riskThe measurable variation in uncertain outcomes based on facts and data.
Diversifiable riskA risk that affects only some individuals, businesses, or small groups.


Question Answer
Systemic riskThe potential for a major disruption in the function of an entire market or financial system.
Market riskUncertainty about an investment's future value because of potential changes in the market for that type of investment.
Liquidity riskThe risk that an asset cannot be sold on short notice without incurring a loss.
Risk source (ISO 31000)Element which alone or in combination has the intrinsic potential to give rise to risk.
Risk managementThe process of making and implementing decisions that will minimize the adverse effects of accidental losses on an organization.
Loss exposureAny condition or situation that presents a possibility of loss, whether or not an actual loss occurs.
HazardA condition that increases the frequency or severity of a loss.


Question Answer
Moral hazardA condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.
Morale hazard (attitudinal hazard)A condition of carelessness or indifference that increases the frequency or severity of loss.
Physical hazardA tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss.
Legal hazardA condition of the legal environment that increases loss frequency or severity.
Property loss exposureA condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest.
Tangible propertyProperty that has a physical form.
Real property (realty)Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land.


Question Answer
Personal propertyAll tangible or intangible property that is not real property.
Intangible propertyProperty that has no physical form.
Liability loss exposureAny condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party.
Personnel loss exposureA condition that presents the possibility of loss caused by a person's death, disability, retirement, or resignation that deprives an organization of the person's special skill or knowledge that the organization cannot readily replace.
Personal loss exposureAny condition or situation that presents the possibility of a financial loss to an individual or a family by such causes as death, sickness, injury, or unemployment.
Net income loss exposureA condition that presents the possibility of loss caused by a reduction in net income.
Pre-loss goalsGoals to be accomplished before a loss, involving social responsibility, externally imposed goals, reduction of anxiety, and economy.
Post-loss goalsRisk management program goals that should be in place in the event of a significant loss.

Assignment 2: Risk Assessment

Question Answer
Balance sheetThe financial statement that reports the assets, liabilities, and owners' equity of an organization as of a specific date.
Income statementThe financial statement that reports an organization's profit or loss for a specific period by comparing the revenues generated with the expenses incurred to produce those revenues.
Statement of cash flowsThe financial statement that summarizes the cash effects of an organization's operating, investing, and financing activities during a specific period.
Hold-harmless agreement (or indemnity agreement)A contractual provision that obligates one of the parties to assume the legal liability of another party.
IndemnificationThe process of restoring an individual or organization to a pre-loss financial condition.
Hazard analysisA method of analysis that identifies conditions that increase the frequency or severity of loss.
Theoretical probabilityProbability that is based on theoretical principles rather than on actual experience.


Question Answer
Empirical probability (a posteriori probability)A probability measure that is based on actual experience through historical data or from the observation of facts.
Probability analysisA technique for forecasting events, such as accidental and business losses, on the assumption that they are governed by an unchanging probability distribution.
Law of large numbersA mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases.
Probability distributionA presentation (table, chart, or graph) of probability estimates of a particular set of circumstances and of the probability of each possible outcome.
Central tendencyThe single outcome that is the most representative of all possible outcomes included within a probability distribution.
Expected valueThe weighted average of all of the possible outcomes of a probability distribution.
MeanThe sum of the values in a data set divided by the number of values.


Question Answer
MedianThe value at the midpoint of a sequential data set with an odd number of values, or the mean of the two middle values of a sequential data set with an even number of values.
ModeThe most frequently occurring value in a distribution.
DispersionThe variation among values in a distribution.
Standard deviationA measure of dispersion between the values in a distribution and the expected value (or mean) of that distribution, calculated by taking the square root of the variance.
Coefficient of variationA measure of dispersion calculated by dividing a distribution's standard deviation by its mean.
Normal distributionA probability distribution that, when graphed, generates a bell-shaped curve.

Assignment 3: Risk Control

Question Answer
Risk controlA conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable.
AvoidanceA risk control technique that involves ceasing or never undertaking an activity so that the possibility of a future loss occurring from that activity is eliminated.
Loss preventionA risk control technique that reduces the frequency of a particular loss.
Loss reductionA risk control technique that reduces the severity of a particular loss.
Disaster recovery planA plan for backup procedures, emergency response, and post-disaster recovery to ensure that critical resources are available to facilitate the continuity of operations in an emergency situation.
SeparationA risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss.
DuplicationA risk control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve.
DiversificationA risk control technique that spreads loss exposures over numerous projects, products, markets, or regions.
Life safetyThe portion of fire safety that focuses on the minimum building design, construction, operation, and maintenance requirements necessary to assure occupants of a safe exit from the burning portion of the building.