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CPCU 500 FINAL EXAM Questions with

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Southwest Interstate Railroad (SIR) is concerned about the number derailments in recent years. It's not cost effective to use human assets to inspect tracks, bridges, and trestles. Instead, SIR has started to use drones. A drone can fly low over tracks and above/below bridges and trestles. The drones record video that is transmitted to corporate headquarters where it is simultaneously scanned for derailment hazards. In the past six months, the drones detected a track blockage caused by a rock slide and damage to tracks in a remote area cause by an earthquake. SIR dispatched work crews to make the tracks once again passable, and no derailments occurred. SIR's use of drones, video, real-term video scanning, and computer analysis illustrates which one of the following? correct answers Preventative analytics Autonomous Vehicle Applications (AVA) is a start-up company that develops safety technologies that can be sold to companies that are producing autonomous vehicles. One technology AVA is developing allows an autonomous vehicle to detect, extract, and analyze images; and then to respond to the images. For example, the technology would detect a presence in a crosswalk, extract the image, and a computer would analyze the image. When the image was determined to be a human being, the vehicle would slow down or stop until the crosswalk was clear. This technology, which is designed to capture and analyze images, and to act on the recognition of the image; is called correct answers Computer vision In addition to metal detectors, many airports have installed a second type of scanning technology for checked baggage and cargo. The checked bags and cargo pass through a portal with scanners programmed to detect and test for explosive trace fumes. These scanners, which detect explosives based on air samples, are an example of what type of sensor used for risk assessment and control? correct answers Biochemical sensors Last year, three Metro City firemen died responding to a fire at a chemical plant, when they were overcome by toxic fumes. In response, Metro City is purchasing advanced first responder gear. It includes special flame retardant suits with chemical and explosive fume sensors, air quality sensors, and heat sensors. Responders will also wear special watches that will track a responder's pulse, respiration, and blood pressure; and helmets that include video cameras. All of these sensors will feed data to a computer in real-time. The computer will analyze the data and issue threat levels and evacuation orders, if necessary. The protective gear Metro City will purchase and the data transmission and analysis capability illustrate the use of correct answers Smart products AMRM Insurance Company sells insurance in Virginia, North Carolina, South Carolina, and Georgia. The company has compiled a policyowner data base that can be used to send text messages when hurricanes approach. The company provides early warnings, storm updates from the National Weather Service, and hurricane safety measures. The company credits the system

with reduced hurricane claims. The use of the texting system is an example of correct answers Preventive analytics Which one of the following statements is true with regard to preventive analytics? correct answers Preventive analytics uses smart products and data analytics to identify root loss causes and their implications. Don is the Risk Manager for Rafferty Corporation. One of his peers, Sally, asks him one day, "How do you define risk?" When Don replies, which one of the following statements is accurate? correct answers Risk has different meanings within the risk management and insurance communities. The difference between risk tech and insurtech is correct answers Risk tech goes beyond insurtech by expanding its focus to making risk financing more efficient and preventing and mitigating losses in a variety of industries. Catastrophes such as recent earthquakes and the 2011 tsunami in Japan pointed out a need for many organizations to evaluate and manage their correct answers Supply-chain risk. William is a risk manager for Green Mountain Trucking. He has always analyzed auto loss frequency and severity rates for the fleet. William would like to collect data on vehicle speeds, braking patterns, and distance traveled and compare that with the loss history. Which one of the following would help William capture and analyze this data? correct answers Vehicle telematics Which one of the following statements about the use of drones is true? correct answers Drones may be equipped with cameras that relay data in real-time. The traditional definition of risk management reflects the traditional concept of risk as correct answers Negative Take Your Order (TYO) is a company that specializes in taking product orders for vendors. The manufacturer of a product can run a television or internet ad for a product with a toll-free number. Customer calls for the products are routed to TYO, where one hundred operators are available to receive the calls. Each operator is assigned a cubicle with a computer terminal, video display monitor, and a telephone. TYO experienced high workers compensation claims from its operators, claiming neck strain, eye strain, and wrist pain. In an effort to reduce such injuries, TYO evaluated each operator's work area. The height of chairs and video monitors were adjusted, curved computer keyboards and wrist-rests were provided, and the telephones were replaced with audio headsets. Workers compensation costs dropped significantly. The science of designing work spaces based on interaction between people and the equipment in the work space is called correct answers Ergonomics The emerging technologies applied to risk assessment and control link the physical domain to the virtual domain. Together, these domains linked by the emerging technologies create a correct answers Connected ecosystem

The National Oceanic and Atmospheric Administration (NOAA), a U.S. Government agency, monitors tsunami risk. Earthquakes under the sea often cause large waves which can have a disastrous impact on coastal communities. In addition to monitoring earthquake data and tides, NOAA recently added a new tool -- tsunami detection buoys. The buoys are placed in the sea and they are equipped with sensors to detect high wave levels so that an early warning can be given to a coastal area if an evacuation is needed. This application of the use of smart products illustrates their use in correct answers Catastrophe management Which one of the following data capture tools has led to an explosion of risk management innovation by allowing smart products to transmit data to each other and to central hubs? correct answers Internet of Things 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 correct answers Mechanical sensors 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 that humans might suffer. They can also be used to perform dangerous tasks and in heavy-lifting jobs. These smart products are called correct answers Robots Mutual Fund Company (MFC) offers a wide array of mutual fund options to investors. Each mutual fund has a different fund objective and set of investment guidelines that apply to the fund. While MFC gives considerable freedom to its fund portfolio managers, they are required to abide by the fund's investment guidelines. To monitor compliance, MFC developed a computer algorithm. The computer algorithm continuously monitors each fund's compliance with investment guidelines. If a fund manager violates the investment guidelines, the computer immediately notifies MFC's internal control director, and corrective action is taken. MFC's use of the computer algorithm to monitor investment compliance and to provide notification when corrective action is necessary illustrates use of correct answers Artificial intelligence Clear-Rite Company specializes in the clean-up of hazardous chemical spills. Workers performing clean-up operations must use safety suits to prevent exposure to the chemicals. The suits include pulse and respiration monitors, body temperature sensors, and chemical sensors. The monitors and sensors report data to a mobile operations center which is deployed to each clean-up site. The pulse and respiration monitors and the sensors that are part of the protective gear are called correct answers Wearable technologies Data Entry Company (DEC) offers customers data entry services. A customer can hire DEC to enter survey data to be analyzed. Many DEC employees spend long hours entering data on a computer. DEC has experienced neck strain and wrist pain complaints from their employees, increasing the company's workers compensation costs. DEC investigated the complaints of its data-entry employees. DEC adopted curved keyboards for data entry, wrist-rests for those

entering data, and uniform chair heights and display monitor heights to reduce neck strain claims. The science of designing work spaces based on the health concerns of those who will operate in the work space is called correct answers ergonomics Risk managers today differ from traditional risk managers in which one of the following ways? correct answers They attempt to minimize threats and optimize opportunities. In an effort to reduce expenses, increase profitability, and reduce human errors; ABC Insurance Company decided to automate most of its personal lines underwriting function. The company now uses standardized application forms that are submitted electronically to one of the company's regional offices. At each regional office, a computer with a scanner reads the applications. The computer has been programmed with acceptable answers to the questions. If the answers on the application are all acceptable, the policy is automatically issued. Rejected applications are automatically forwarded to a human underwriter who reviews them. The use of this technology has reduced the company's expense ratio by two and a half percent, and reduced the time it takes to issue a policy. ABC Insurance Company's use of computers to evaluate applications electronically is an application of correct answers Artificial intelligence Which one of the following is described as a distributed database that serves as a collectively shared ledger? correct answers Blockchain Which one of the following statements is true regarding the evolution of risk and risk management? correct answers The definition of risk has evolved to include positive as well as negative attributes. Which one of the following is a tool that can be used by fraud investigators to compare documents and analyze notes? correct answers Text mining The relationship between which two basic measures is critical for risk management in assessing risk and deciding whether and how to manage it? correct answers Likelihood and consequences Which one of the following statements is true regarding the basic measures that apply to risk management? correct answers Consequences measure the degree to which an occurrence could positively or negatively affect an organization. Risk can be classified as subjective or objective. Which one of the following statements is correct with respect to these risk classifications? correct answers Subjective risk can exist even where objective risk does not. 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? correct answers The new production machine

An organization must meet the standard of care that it owes to others in order to ensure that correct answers Legal obligations are satisfied. The focus of risk quadrants is different from the focus of risk classifications in general. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on correct answers The source of risk and who has traditionally managed it. Which one of the following risk management program goals enhances an organization's reputation? correct answers Social responsibility The fundamental purpose of a risk management framework is to correct answers integrate risk management throughout the organization. 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? correct answers Correlation Which one of the following provides a measure of the maximum potential damage associated with an occurrence? correct answers Exposure 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 correct answers Both a hazard risk and an operational risk. Which one of the following is one of the five steps of the risk management process? correct answers Scan environment 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 is classified as correct answers A strategic risk Which of the following risk management program goals is an essential goal for all public entities? correct answers Continuity of operations 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 correct answers Subjective risk Which one of the following statements is accurate regarding pure and speculative risks? correct answers Every business venture involves speculative risks

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 of the following statements is true regarding the risk involved in George's options? correct answers The rental property presents both pure and speculative risk; property values may increase, and the building could burn down. Aligning risks with the organization's risk appetite defines correct answers Tolerable uncertainty. Which one of the following risk management objectives is critical for a manufacturer seeking new capital from investors, stockholders, and creditors? correct answers Reduce the deterrent effects of hazard risks According to the law of large numbers; as the number of exposure units insured increases, correct answers The relative accuracy of predictions about future losses increases. Risks from accidental loss, including the possibility of loss or no loss defines correct answers Hazard risk. Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification? correct answers Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. A new computer chip that could position a company for explosive growth is an example of correct answers strategic risk. Jean is the Risk Manager for a Fortune 1000 company. Her CFO has tasked her to analyze vulnerabilities in the firm's supply chain. The adequacy of suppliers to meet an organization's needs would be an example of which one of the following types of risk? correct answers Operational risk Mid-State Packing Company, a meat processing company, is the largest private sector employer in Metro City. First National Bank of Metro City loans money to Mid-State Packing Company and to many of the employees of Mid-State. The problem with First National Bank of Metro City loaning money to both the business and many employees of the business is that correct answers Loan defaults are likely to be highly correlated. According to the law of large numbers, as the number of exposure units insured increases, correct answers the relative accuracy of predictions about future losses increases. 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 correct answers Strategic risk Insurance deals primarily with correct answers pure risks.

One of the levels of risk a business faces is the risk of accidental loss, including the possibility of loss or no loss. This category of risk is correct answers Hazard risk. Which one of the following types of risks can result in losses but not in any gains? correct answers Hazard risks 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 correct answers Subjective risk. George works for a large company and part of his job is to monitor assets according to their liquidity. George is particularly concerned that the company fleet cars are affecting its liquidity and rising fuel prices are having an adverse effect during tight economic markets. If George's concerns were categorized as causes of loss according to the quadrants of risk, his concern most directly relates to which one of the following types of risks? correct answers Strategic risks 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? correct answers Hazard risks Risk can be classified as pure or speculative. Which one of the following is the best example of a speculative risk? correct answers Investing in shares of stock One enterprise risk management (ERM) approach to categorizing risks involves dividing risks into four risk quadrants. The risks categorized as hazard risks are correct answers Traditionally managed by risk management professionals. Regarding diversifiable and nondiversifiable risk, which one of the following statements is accurate? correct answers Systemic risks are generally nondiversifiable. Classifying risk appropriately can help in managing risk. Which one of the following statements is correct with respect to the classifications of risk? correct answers A pure risk is a chance of loss or no loss, but no chance of gain. Which one of the following risk management program goals enhances an organization's reputation correct answers Social responsibility Which one of the following best describes the categories of risk included in the enterprise risk management model? correct answers Operational, strategic, financial, and hazard Which one of the following is one of the five steps of the risk management process? A. Scan environment B. Allocate resources

C. Establish accountability D. Align and integrate correct answers Scan environment According to the law of large numbers, as the number of exposure units insured icnreases, correct answers The relative accuracy of predictions about future losses increases. A worker for Build-Rite Construction Company removed the pressure gauge and warning sticker from an air compressor. The pressure gauge automatically shuts off the compressor when the pressure gets too high. The sticker warned that an explosion could result if the pressure was too high. Without the pressure gauge in place, the air compressor exploded. The explosion killed one worker and severely injured another. If Build-Rite performs a root cause analysis (RCA) of this fatal accident, which one of the following might be determined to be a root cause? correct answers Inadequate training Alice is an assembly-line worker in an auto parts manufacturing plant. One day she notices some irregularities in the operation of the punch press. Concerned about meeting production goals, she continues to operate the punch press without reporting the malfunction. Later that day, the punch press shatters, injuring Alice and several of her co-workers. This example best illustrates the accident causation theory of the correct answers Domino theory. Harris Company is analyzing its workers compensation loss exposure. Harris Company retains most of the exposure and purchases excess insurance to cap its liability on any individual claim. Because Harris Company has a large work force, it can predict its workers compensation cost with some level of accuracy. For next year, the risk manager estimates that there is a 70% chance that workers compensation costs will be $6 million or less, a 25% chance workers compensation costs will be between $6 million and $8 million, and a 5% chance workers compensation costs will exceed $8 million. The type of analysis the risk manager performed is called correct answers Quantitative analysis. East Side Fitness has decided to merge with a yoga studio with two locations near-by. The owners believe that with this complimentary business, they will be able to increase the membership fees for current members and also grow the overall membership. Which one of the following quadrants of risk will be most influenced by this decision? correct answers Strategic risk A systematic procedure that uses the results of other analysis techniques to identify the predominant determinants of an accident is called correct answers Root cause analysis. Which one of the following statements about root cause analysis (RCA) is true? correct answers A root cause must produce effective recommendations for prevention of future accidents. The use of risk quadrants to identify and categorize risk provides a framework for correct answers Holistic risk identification. 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? correct answers Variance Which one of the following theories of accident causation presumes that accidents are the result of a chain of accidental factors? correct answers Sequence of events theory According to the technique of operations review approach, one category of fault of an organization's management is correct answers Failure to take responsibility. Northern Consolidated is evaluating the financial risk associated with its investment portfolio. The risk manager knows that as interest rates increase, bond values decrease. This relationship is known as correct answers A negative covariance. Brendan is a new risk manager at a Shelton Manufacturing in North Carolina. Because the company has never experienced any consequences from a hurricane, the previous risk manager never really analyzed the risks associated with such an event. Brendan feels that a hurricane could trigger multiple far-reaching consequences and that the risk requires a thorough analysis. Due to Shelton Manufacturing's lack of historical data Brendan has decided to use a structured process that incorporates expert opinions into the probability estimations. Which one of the following types of risk assessment is Brendan using? correct answers Predictive technique Risk manager Christine is analyzing the risks faced by her company, Clear Sky Technology. She assigns a rating based on the significance of the consequences of the various risks. Her four ratings are: Low, Medium-Low, Medium-High, and High. The ratings that Christine assigns are a correct answers Qualitative assessment. SoCal Movie Company produces movies at a studio in Southern California. The risk manager decided to identify the range of potential consequences associated with various risks that the company faces. For example, if a severe earthquake occurred while the company was filming a movie, there could be deaths and injuries, destruction of movie sets, delays in production, costs associated with filming at an alternative location, and loss of reputation and good will. The type of analysis performed by the risk manager is called correct answers Scenario analysis. After a month in which three employees were seriously injured at company paper mills, Ashley, the risk manager of Bright White Paper Company, wanted some answers about the causes of employee injuries. Ashley independently contacted the plant manager and foreman at each of the company's plants. She asked each person to complete a confidential questionnaire regarding safety procedures. After receiving the responses to the questionnaire, Ashley summarized the results and asked the same questions again instructing each person to consider revising their responses based on the initial questionnaire results. The analysis revealed that new workers were not being properly trained and that a lax attitude toward safety was present at the majority of the plants. The team approach to risk identification Ashley employed is called correct answers The Delphi technique.

After one employee was involved in several workplace accidents, the risk manager and the industrial safety engineer concluded that these resulted from ancestry and social environment of the person. Which one of the following accident causation theories or approaches considers this an accident factor? correct answers Sequence of events theory SE Industries has identified windstorm as a risk. The risk manager has assembled a team to project the potential consequences of windstorm. The team includes individuals from various functions within the organization. Which one of the following team approaches to risk identification is SE Industries using? correct answers Scenario analysis The second step in the root cause analysis (RCA) process is charting the agents that directly result in one event triggering another event. In RCA, these agents are called correct answers Causal factors. Home Appliance Company has decided to change its production method. Previously, small teams of workers assembled washers, dryers, and dishwashers. Under the new production method, an assembly-line will be used, with some functions performed by robotics. Before making the change, Home Appliance Company has created a team of experts from company personnel to identify all of the risks inherent in the new production method and to recommend measures to address these risks. The team will assemble in a facilitated workshop and follow these steps:

• Divide the production method into components
• Review each component to identify risk
• Identify causes and potential outcomes for each risk
• Develop a solution for each risk This team approach is risk identification is called a correct answers Hazard and operability (HAZOP) study. Which one of the following types of risk analysis uses historical data to assign specific values to consequences and their probabilities to reach a numeric indication of the level of risk? correct answers Quantitative analysis Big data correct answers sets of data that are too large to be gathered and analyzed by traditional methods. Smart product correct answers An innovative item that uses sensors; wireless sensor networks; and data collection, transmission, and analysis to further enable the item to be faster, more useful, or otherwise improved. Internet of Things (IoT) correct answers A network of objects that transmit data to and from each other without human interaction. Cloud computing correct answers information, technology, and storage services contractually provided from remote locations, through the internet or another network, without a direct server connection

Blockchain correct answers A distributed digital ledger that facilitates secure transactions without the need for a third party. Telematics correct answers The use of technological devices in vehicles with wireless communication and GPS tracking that transmit data to businesses or government agencies; some return information for the driver. Text mining correct answers Obtaining information through language recognition Insurtech correct answers The use of emerging technologies in the insurance industry Sensor correct answers A device that detects and measures stimuli in its environment Preventive analytics correct answers Statistical and analytical techniques used to influence or prevent future events or behaviors. Transducer correct answers A device that converts one form of energy into another. Actuator correct answers A mechanical device that turns energy into motion or otherwise effectuates a change in position or rotation using a signal and an energy source. Accelerometer correct answers A device that measures acceleration, motion, and tilt. Ergonomics correct answers The science of designing work space and equipment based on the needs of the people who use the work space and equipment. Risk management framework correct answers A foundation for applying the risk management process throughout the organization. Risk criteria correct answers Information used as a basis for measuring the significance of a risk. Pure risk correct answers A chance of loss or no loss, but no chance of gain. Speculative risk correct answers A chance of loss, no loss, or gain. Credit risk correct answers The risk that customers or other creditors will fail to make promised payments as they come due. Subjective risk correct answers The perceived amount of risk based on an individual's or organization's opinion. Objective risk correct answers The measurable variation in uncertain outcomes based on facts and data. Diversifiable risk correct answers A risk that affects only some individuals, businesses, or small groups.

Systemic risk correct answers The potential for a major disruption in the function of an entire market or financial system. Market risk correct answers Uncertainty about an investment's future value because of potential changes in the market for that type of investment Liquidity risk correct answers The risk that an asset cannot be sold on short notice without incurring a loss. Risk appetite correct answers Amount of risk an organization is willing to take on in order to achieve an anticipated result or return. Value at risk (VaR) correct answers A technique to quantify financial risk by measuring the likelihood of losing more than a specific dollar amount over a specific period of time. Cost of risk correct answers The total cost incurred by an organization because of the possibility of accidental loss. Exposure correct answers Any condition that presents a possibility of gain or loss, whether or not an actual loss occurs. Volatility correct answers Frequent fluctuations, such as in the price of an asset. Likelihood correct answers A qualitative estimate of the certainty with which the outcome of a specific event can be predicted. Consequences correct answers The effects, positive or negative, of an occurrence. Time horizon correct answers Estimated duration Correlation correct answers A relationship between variables Delphi technique correct answers Two rounds of queries to the selected experts. Question and response cycle Scenario Analysis correct answers identifies risks and predicts the potential consequences of those specific risks HAZOP correct answers Hazard and Operability study; comprehensive review of a process or system. Team of experts identifies the risks associated with a given process and recommends a solution. Good when all risks must be eliminated SWOT Analysis correct answers strengths, weaknesses, opportunities, threats; useful in analyzing a new project or product

Risk control correct answers A conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable. Energy transfer theory correct answers An approach to accident causation that views accidents as energy that is released and that affects objects, including living things, in amounts or at rates that the objects cannot tolerate Technique of Operations Review (TOR) correct answers An approach to accident causation that views the cause of accidents to be a result of management's shortcomings. Change analysis correct answers An analysis that projects the effects a given system change is likely to have on an existing system. Job Safety Analysis (JSA) correct answers An analysis that dissects a repetitive task, whether performed by a person or machine, to determine potential hazards if each action is not performed. Best for repetitive human tasks Four Basic Characteristics of Root Cause Analysis correct answers 1. Specific Underlying Cause

2. Reasonably identified
3. Expressed as something that can be modified
4. Prevented through effective recommendations Causal factors correct answers The agents that directly result in one event causing another. Risk treatment correct answers The selection and implementation of actions to help manage or mitigate a risk. Residual risk correct answers The level of risk remaining after actions are taken to alter the level of risk. Avoidance correct answers A 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 prevention correct answers A risk control technique that reduces the frequency of a particular loss. Loss reduction correct answers A risk control technique that reduces the severity of a particular loss. Risk transfer correct answers The shifting of risk from one individual or organization to another. Retention correct answers A risk financing technique that involves assumption of risk in which gains and losses are retained within the organization. Four categories of loss likelihood in the Prouty Approach: correct answers 1. Almost nil: extremely unlikely to happen

2. Slight: could happen, but not likely
3. Moderate: happens occasionally
4. Definite: happens regularly Three categories of loss impact in the Prouty Approach: correct answers 1. Slight
5. Significant
6. Severe Risk financing correct answers A risk management technique that includes steps to pay for or transfer the cost of losses. Internet of Things (IoT) correct answers A network of objects that transmit data to computers. Machine learning correct answers Artificial intelligence in which computers continually teach themselves to make better decisions based on previous results and new data. Hedging correct answers A financial transaction in which one asset is held to offset the risk associated with another asset. Derivative correct answers A financial instrument whose value is derived from the value of an underlying asset, which can be an index, an asset, yield on an asset, weather conditions, inflation, loans, bonds, an insurance risk, or other items. Diversification correct answers A risk control technique that spreads loss exposures over numerous projects, products, markets, or regions. Insurance correct answers A risk management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer. Hazard Risk correct answers Property, liability, personnel, consequential losses; pure risk Operational Risk correct answers People, processes, systems, or controls; pure risk Financial Risk correct answers Effect of market forces on financial assets or liabilities; speculative risk Strategic Risk correct answers Trends in the economy and society; speculative risk Waiver correct answers The intentional relinquishment of a known right. Exculpatory clause (exculpatory agreement) correct answers A contractual provision purporting to excuse a party from liability resulting from negligence or an otherwise wrongful act. Hold-harmless agreement (or indemnity agreement) correct answers A contractual provision that obligates one of the parties to assume the legal liability of another party.

Windstorm correct answers A storm consisting of violent wind capable of causing damage. Tornado correct answers A type of violent windstorm that consists of winds rotating at speeds of up to 300 miles per hour; a partial vacuum develops at the center of the storm (vortex) Box action design correct answers Earthquake-resistant construction, used in buildings under three stores tall, that integrates roof and floor diaphragms that can flex to transmit and distribute the forces an earthquake exerts on a structure. Frame action design correct answers Earthquake-resistant construction that relies on the resilience of steel or specially designed reinforced concrete to absorb energy while undergoing considerable distortion and return to their original shapes. Book value (net depreciated value) correct answers An asset's historical cost minus accumulated depreciation. Historical cost correct answers The original cost of a property. Replacement cost correct answers The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation. Functional replacement cost correct answers The cost of replacing damaged property with similar property that performs the same function but night be identical to the damaged property. Market value correct answers The price at which a particular piece of property could be sold on the open market by an unrelated buyer and seller Economic value correct answers The amount that property is worth based on the ability of the property to produce income. Fiduciary duty correct answers The duty to act in the best interests of another. Three Prevalent Human Resource Risks: correct answers - Work-related injury and illness

• Retirement and resignation
• Work-related violence Enterprise-Wide Risks: Strategic Risk correct answers Uncertainties associated with the organization's long-term goals and management decisions; mergers/acquisitions Enterprise-Wide Risks: Operational Risk correct answers Uncertainties associated with the organization's procedures, systems, and policies; compliance issues, legal issues, credit policies, customer service, software Enterprise-Wide Risks: Financial Risk correct answers Uncertainties associated with the organization's financial activities; cash flow, interest rates, foreign exchange transactions, lines of credit, liquidity of assets, depreciating equipment, cost of raw materials

An organization practicing holistic risk management would assess the cost of raw materials and foreign exchange risk under which one of the following quadrants of risk? correct answers Financial risk An analysis that projects the effects a given system change is likely to have on an existing system is known as correct answers Change analysis Which one of the following is a major benefit that blockchain technology provides to holistic risk management? correct answers Because of their security, blockchains can eliminate the need to verify the accuracy of risk management data. A risk manager for an organization has proposed a meeting to ask a series of "What if?" questions to project the consequences for implementing alternative processes under consideration. Which one of the following system safety analysis techniques is the risk manager proposing? correct answers Change analysis Joe works in an auto garage. His work area is cluttered and disorganized. His supervisor is rarely in the area, and Joe lacks direction and proper training. Joe is injured when he receives a severe shock from improper grounding while using a piece of electrical equipment. This example best illustrates the accident causation theory of the correct answers Technique of operations review (TOR) approach An organization has had a high percentage of repetitive stress injuries to workers in a particular phase of their production process. The risk manager has been asked to analyze these injuries from a system safety analysis perspective. Which one of the following techniques should the risk manager use to investigate these accidents? correct answers Job safety analysis The use of risk quadrants to identify and categorize risk can provide a framework for risk identification. One quadrant includes such risks as loss of production due to a key supplier not delivering raw materials or a mechanical breakdown of equipment. This risk quadrant is correct answers Operational risk. 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? correct answers Production-based RCA To accurately determine its level of risk, an organization must examine the effectiveness of its efforts to prevent losses from occurring and to reduce the severity of losses that do occur. An organization's efforts in this area are called correct answers Risk control Safety-based RCA correct answers accident analysis and occupational safety and health Production-based RCA correct answers quality control procedures for industrial manufacturing

Process-based RCA correct answers Production-based RCA (quality control procedures for industrial manufacturing) and includes business processes Failure-based RCA correct answers stems from failure analysis and is used primarily in engineering and maintenance Systems-based RCA correct answers combines four approaches with change management, risk management, and systems analysis concepts Which one of the following system safety techniques is best suited to analyze repetitive human tasks performed in a sufficiently stable environment where most hazards are foreseen? correct answers Job safety analysis From a system safety perspective, change analysis is an analysis correct answers That projects the effects a given system change is likely to have on an existing system. Modifying the contact surface or basic structure that can be affected by installing breakaway highway light poles or requiring front and side airbags in automobiles to cushion occupants' impact is a basic strategy of the correct answers Energy transfer theory A risk control technique that reduces the frequency of a particular loss is correct answers Loss prevention Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to drive it to special events at schools around the country where it will serve as a mobile billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to insure his vehicle because it fails to meet one of the ideal characteristics of an insurable risk. Which characteristic is Oscar's vehicle least likely to meet? correct answers Large number of similar exposure units Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures? correct answers A common function that insurance provides is a spreading of risk across a large number of similar exposure units within the same period. An organization may use a large deductible plan to achieve the purpose of which one of the following? correct answers Defer cash outflows for retained loss reserves A local shopping center reduced its net income loss after a fire by incurring additional expenses to shorten the time it takes to repair the damage and reopen the shopping center. Bob, the owner of the center, hired a contractor to work around the clock until repairs were completed. This reduced Bob's net income loss because he was able to repair the shops sooner. Bob's action is an example of which one of the following risk management techniques? correct answers Loss reduction Which one of the following is a major benefit that smart insurance contracts can provide to insurance customers? correct answers Smart contracts can dramatically increase the speed of loss payments.

The control technique that disperses a particular asset or activity over several locations and regularly relies on that asset or activity as a part of an organization's working resources is which one of the following? correct answers Separation The risk control technique that spreads loss exposure over numerous projects, products, markets, or regions is which one of the following risk management techniques? correct answers Diversification Telematics devices allow organizations to accurately identify patterns of risk and predict risk for which one of the following types of loss exposures? correct answers Automobile Blithe Drug Manufacturing has developed a drug that cures obesity. However, the side effects are significant and potentially fatal. Blithe decides not to manufacture and sell the drug. This is an example of correct answers Avoidance In both noninsurance risk control and noninsurance risk financing transfers, correct answers A contract is usually formed before any loss occurs. Emerald Industries has just invested a large sum in new, highly-sophisticated computer equipment and building renovations. Emerald installed state-of-the-art smoke detection devices throughout the facility. Emerald's state-of-the-art smoke detection devices are an example of correct answers Loss reduction When negotiating noninsurance risk transfer terms, risk management professionals should consider the correct answers Legal enforceability of contract provisions. Ideally insurable loss exposures are subject to losses that correct answers Are definite in time, cause, and location. 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 correct answers A following-form excess policy. One type of noninsurance risk control transfer, a disclaimer of warranties, is used to correct answers Deny any express warranties made in conjunction with the sale of property. Internet of Things (IoT) devices, sensors, wearables, and telematics devices have had the greatest impact on which one of the following risk treatment techniques? correct answers Risk modification Each of the risk control techniques of duplication, separation, and diversification correct answers Reduce the severity of loss associated with the organization's loss exposures. Advancement in machine learning and artificial intelligence (AI) have helped insurers do all of the following, EXCEPT: correct answers Completely prevent customers' risk.

Under a large deductible plan, the amount that the insurer incurs to adjust losses correct answers Can be inside or outside the deductible The control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve is which one of the following risk management techniques? correct answers Duplication Ideally insurance loss exposures are subject to losses that correct answers Are definite in time, cause, and location. Which one of the following is a risk control technique that reduces the frequency of a particular loss? correct answers Loss prevention Leasing is a useful noninsurance risk control transfer because correct answers Certain loss exposures accompany property ownership but do not accompany its use or occupancy. An exculpatory clause is correct answers Contractual provision that relieves one party from liability resulting from a negligent or wrongful act. Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the policy period. The provision supports the principle that insurable loss exposures must ideally be correct answers Definite Which one of the following technologies can provide the infrastructure upon which smart contracts are built and implemented? correct answers Blockchain Which one of the following risk control techniques is generally used to reduce the frequency of a particular loss? correct answers Loss prevention A risk control technique that reduces the severity of a particular loss is correct answers Loss reduction An advantage of a large deductible plan is that it allows the insured organization to correct answers Benefit from the cash flow available on the retained loss reserves. The risk manager of a large manufacturing company has been asked by the CFO to develop a strategy to eliminate property damage at a particular site. Which one of the following risk control techniques can the risk manager use to reduce the probability of loss to zero? correct answers Avoidance Private insurers are reluctant to provide windstorm insurance on coastal properties. This is because the loss exposures fail to meet the criterion that ideally insurable exposures must be correct answers Independent and not catastrophic.

Hold-harmless agreements are correct answers Comprised of two parties - the indemnitor and the indemnitee. An organization that operates warehouses in two locations is using the risk control technique of correct answers Separation A large deductible is similar to a self-insured retention (SIR) in that both correct answers Require the insured organization to retain a relatively large amount of loss. Large deductible plans correct answers Lower an organization's cost of risk Diversification is a risk control technique that correct answers spreads loss exposures over numerous projects, products, markets, or regions Construction contracts typically hold the correct answers landowner harmless for certain construction-related claims Advancements in machine learning and artificial intelligence (AI) have helped insurers do all of the following, EXCEPT: correct answers Completely prevent customers' risk Due to fierce local competition, the CEO of Apex Manufacturing is planning to expand into other geographical markets. Which one of the following risk control techniques, dealing primarily with business risk, is the CEO applying? correct answers Diversification "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? correct answers Limited form Which one of the following is true about the liability involved in contracting services? correct answers The responsibility that certain duties be performed safely cannot be delegated to another party, such as the duty of common carriers to carry passengers safely. Maxwell Company has just invested a large sum in new, highly-sophisticated computer equipment and building renovations. Maxwell arranged to lease identical equipment at another location so that it could use the equipment in the event of a disaster at its location. Maxwell's lease of identical equipment at another location is an example of correct answers Duplication The risk control technique that reduces the severity of a particular loss is which one of the following? correct answers Loss reduction Concerning fundamental guidelines of contractual risk transfer management, it is wise to correct answers Require a certificate of insurance for contractual liability before contractual operations begin.

Cold Coolers, Inc., has its main warehouse in St. Louis. It also stores inventory in two warehouses in other cities to reduce the distance between their warehouses and retail locations. Cold Coolers is using which one of the following risk management techniques? correct answers Separation Ivanhoe Corporation purchases stock in a bank and in a pharmaceutical manufacturer. Because these are unrelated industries, Ivanhoe hope that any losses in one stock will be more than offset by profits in another. Ivanhoe is using which one of the following risk management techniques? correct answers Diversification Party A and Party B have entered into a contract specifying that Party A will hold Party B harmless from claims arising from their joint fault. This is an example of which one of the following forms of a hold-harmless agreement? correct answers Intermediate form 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 correct answers Definite An organization may use a large deductible plan to achieve the purpose of which of the following? correct answers Defer cash outflows for retained loss reserves Large deductible plans.. correct answers Lower an organization's cost of risk Statutory limitations on hold-harmless agreements vary in the correct answers Types of noninsurance transfers to which the statutes apply. Limited form correct answers General Contractor agrees to indemnify Building Owner only for claims that result from General Contractor's own negligence, often referred to as sole fault. Intermediate form correct answers General Contractor agrees to indemnify Building Owner only for claims that result from General Contractor's sole fault or from both parties' joint fault. Broad form correct answers General Contractor agrees to indemnify Building Owner for losses that result from General Contractor's sole fault, both parties' joint fault, or Building Owner's sole fault. Key risk indicator (KRI) correct answers A tool used by an organization to measure the uncertainty of meeting a strategic business objective. Exposure indicator correct answers A metric used to identify risk inherent to an organization's operations Robotic process automation (RPA) correct answers A program that automates repetitive organizational processes. Most often used for administrative tasks, such as data entry.

Business process management (BPM) correct answers An enterprise-wide approach that looks to optimize business processes, making use of automatization when appropriate. Interest rate risk correct answers The risk that a security's future value will decline because of changes in interest rates. Exchange rate risk correct answers Uncertainty about an investment's value because of potential changes in the exchange rate between currencies. Counterparty risk correct answers The risk that the other party to an agreement will default Price risk correct answers The potential for a change in revenue or cost because of an increase or a decrease in the price of a product or an input Securities correct answers Written instruments representing either money or other property, such as stocks and bonds. Collateralize correct answers The act of pledging an asset, like real property, to secure a loan or investment by providing recourse in the event of default. Forward contract correct answers A contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price. Credit risk is the same as correct answers Counterparty risk Is there credit risk if a customer pays the loan every time? correct answers No Input price risk or output price risk can lead to correct answers loss of revenue Input price risk correct answers the uncertainty of the price of the resources used to produce an organization's product Output price risk correct answers The uncertainty regarding the price an organization can charge for its product Financial risk correct answers refers to the uncertainty about the future investment returns of a given asset and can be classified as market risk, credit risk, or price risk. Balance sheet correct answers listing of everything that the organization owns and everything that it owes at a particular moment in time; snapshot of the company's financial position as of that date Assets - Liabilities = correct answers owners equity, book value, surplus, shareholders' equity Where is shareholders equity listed on the balance sheet and why? correct answers Listed on the liabilities side because it "owes" its net worth to its owners

Assets correct answers resources an organization owns or uses to operate its business Depreciation correct answers describes allocation of a noncurrent tangible asset's value over its useful life Liabilities correct answers debts and obligations that represent claims against an organization's assets Historical costs correct answers price paid for assets Fair value correct answers current fair market value If assets are listed at historical cost instead of current fair market value, correct answers net worth would not reflect the market value of the assets When is shareholders' equity negative? correct answers When Liabilities > Assets Liquidity ratios correct answers measure a company's ability to convert assets to cash Working capital correct answers excess of a company's current assets over its current liabilities Working capital = correct answers Current assets - Current liabilities Current ratio = correct answers Current assets / Current liabilities Acid-test ratio or Quick Ratio = correct answers (Cash + Marketable securities + Accounts Receivable) / Current Liabilities Debt to equity ratio = correct answers Long-term debt / Shareholders' equity Debt to assets ratio = correct answers Total liabilities / Total assets Leverage ratios correct answers measure the degree to which managers use debt or equity to finance ongoing operations If the company's debt to asset ratio is less than 0.5, then correct answers the company is financing most of its assets through the equity contributions of its shareholders If the company's debt to asset ratio is greater than 0.5, then correct answers most of the company's assets are financed through debt Securitization correct answers The process of creating a marketable investment security based on a financial transaction's expected cash flows.

Special purpose vehicle (SPV) correct answers An intermediary that enables the bank to convert its mortgage receivables asset into a cash asset; established to purchase income-producing assets from an organization, holding title to them, and the using those assets to collateralize securities that will be sold to investors Subprime Borrowers correct answers A type of borrower who has a low credit rating or a limited credit history 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? correct answers Current ratio The balance sheet provides a snapshot of an organization's financial condition correct answers At a given point in time. Like most insurance companies, the majority of Insurance Company's portfolio is invested in bonds. If interest rates increase, the value of the bonds in the portfolio will decrease. This risk to Insurance Company is called correct answers Interest rate risk. The basic accounting equation on which the balance sheet is structured is correct answers Assets = Liabilities + Net Worth An organization can use securitization to exchange correct answers Income-producing assets for cash. Which one of the following statements about the balance sheet is correct? correct answers 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 Home Housewares Inc. is a retail store applying for commercial coverage with ABC Insurance. The underwriter requested a copy of Home Houseware's most recent financial statements. The underwriter will use the balance sheet to determine correct answers Home Houseware's financial position as of the balance sheet date. One financial risk for an insurer is that the insured will not pay all of the premiums when the premiums are due. This type of risk is called correct answers Credit risk A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them and then using those assets to collateralize securities that will be sold to investors is correct answers A special purpose vehicle

If an organization directly securitized its income-producing assets without using a special purpose vehicle (SPV) as an intermediary, investors correct answers Must consider the overall credit risk of the organization An important liquidity measure for a business is its working capital. Working capital is equal to correct answers Current assets minus current liabilites A construction company based in the U.S. has building contracts in five different foreign nations. The construction company agreed to accept payment for its work in each country's currency. The risk of loss of value when these foreign payments are converted to U.S. dollars is called correct answers Exchange-rate risk On a local television program, a financial reporter stated, "There will be big news this week about Sixth National Bank's bad real estate development loans. Unless they get acquired soon, the bank will be broke." The next morning, long lines of depositors waited outside of each Sixth National Bank branch. When the branches opened, depositors began withdrawing their funds. Sixth National Bank did not have enough funds to pay all the depositors and had to close early, which only further compounded the problem. Which one of the following financial risks is Sixth National Bank facing by not having enough cash on hand to meet the immediate demand? correct answers Liquidity risk A major benefit of involving a special purpose vehicle (SPV) in a securitization transaction is that investors can decide whether to invest in the securities based on the correct answers Risk presented by the income-producing assets held as collateral by the SPV Owners' equity represents the capital contributed by an organization's owners plus the organization's correct answers Retained earnings Which one of the following is an example of a noncurrent liability? correct answers Long-term notes payable Which one of the following statements is true about an organization's balance sheet? correct answers The balance sheet shows the financial position of a business on a specific date 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 correct answers Credit risk The process of creating a marketable investment security based on the expected cash flows from a financial transaction is correct answers Securitization Which one of the following statements is true regarding a generic model of a securitization? correct answers The organization sells income-producing assets to an SPV in exchange for cash