TABLE OF CONTENTS

ANSWERS TO THE
Assignment

QUESTIONS IN THE
COURSE GUIDE
Foundations of Risk
Management and Insurance
CPCU 500
1st EDITION
2015 2016

Published by:
KEIR EDUCATIONAL RESOURCES
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Title

Page

Introduction to Risk Management

Risk Assessment

30

Risk Control

47

Risk Financing

55

Enterprise-Wide Risk Management

71

Insurance as a Risk Management Technique

79

Insurance Policy Analysis

97

Common Policy Concepts

115

Assignment 1
Introduction to Risk Management
Educational Objective 1
Three important concepts in the context of risk are:
Uncertainty Uncertainty implies the potential for either
favorable or unfavorable outcomes.
Possibility Possibility of loss is often discussed in
terms of loss exposures, such as liability, personal, or human
exposures, but it can also be the possibility of loss of goodwill or
missed opportunities. Loss exposures can be circumstances or
conditions that present the possibility of a financial loss, regardless
of whether or not an actual loss occurs.
Possibility compared with probability The distinction
may hinge upon the degree of likelihood. If there is a 1% chance of
something occurring, then that phenomenon is possible. If there is a
75% probability, then there is more than a mere possibility.
Possibility means that something could happen; probability means
that something is likely to happen.

Key Word and Phrase

1.
Probability is the likelihood that an event will occur.
Probability can be measured and is often stated in mathematical
terms as a decimal, a fraction, or a percentage. For credible results,
measurement must be done in a stable environment with sufficient
experience.

Review Questions
1-1.
The two elements of risk are the possibility of loss and an
uncertain outcome.
1-2.
Possibility differs from probability. Possibility means that
there is the chance something could happen. The event will not
necessarily happen. A person could be struck by lightning on a golf
course or he could not be struck. By contrast, probability is the
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relative frequency with which an event can be expected to occur in

the long run in a stable environment. Probability is typically
expressed as a percentage or a fraction. One example of probability
arises from tossing a coin. Given many tosses, a coin can be
expected to come up heads 50% or one half of the time.
1-3.
When an organization comprehends the probabilities of
various outcomes, it can focus its efforts on manageable risks. In
addition, entities can utilize probabilities to determine which
operations and risks are worth doing and which risk management
techniques might be selected and implemented to reduce loss
frequency and severity.

Application Question
1-4.

Atwells risks include:

(a)
Atwell faces uncertainty about whether it will be
awarded some of the annual contracts, and it faces uncertainty over
which contracts it will be awarded in the coming year. Atwell is also
uncertain about whether it will be able to compete successfully with
its major competitors.
(b)
Atwell faces the possibility of losing contracts if it is
not the lowest bidder or receives low evaluations of its performance
and level of service. The new buses make it possible for Atwell to
provide a higher level of service and better overall performance than
its competitors.
(c)
The probability that Atwell will have more than two
buses out of service at any given time is low, because Atwell owns
200 new buses.

MULTIPLE CHOICE
QUESTIONS WORKBOOK

CONTENTS
Assign

Title

Que

Ans

72

Introduction to Risk Management

Risk Assessment

16

77

Risk Control

25

83

Risk Financing

31

87

Enterprise-Wide Risk Management

42

93

1st Edition

Insurance as a Risk
Management Technique

47

96

2015 2016

Insurance Policy Analysis

55

101

Common Policy Concepts

62

106

Foundations of Risk
Management and Insurance
CPCU 500

Published by:
KEIR EDUCATIONAL RESOURCES
4785 Emerald Way
Middletown, OH 45044
1-800-795-5347
1-800-859-5347 FAX
Email customerservice@keirsuccess.com

2016 Keir Educational Resources

800-795-5347

Assignment 1

5.

Diversifiable risks tend to occur:

(Text 1.9)

Introduction to Risk Management

1.
Which of the following elements is included in the definition
of risk?
(Text 1.4)
(A)
Probability of a negative outcome
(B)
Possibility of injury
(C)
Likelihood of loss
(D)
A measurable event
2.
If a risk presents a chance of loss, gain, or no loss, it is what
kind of risk?
(Text 1.5)
(A)
Speculative
(B)
Diversifiable
(C)
Pure
(D)
Objective
3.

What kind of risk have risk managers traditionally managed?

(Text 1.6-1.7)
(A)
Credit risk
(B)
Business risk
(C)
Hazard risk
(D)
Liquidity risk

4.
When a particular event has severe effects, such as the
damage from an earthquake, people are likely to:
(Text 1.8)
(A)
Understate the probability of death from such event.
(B)
Overstate the probability of death from such event.
(C)
Perceive more accurately the likelihood of deaths
from such event.
(D)
Assign lower probability of deaths when the event is
covered by the media.

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(A)
(B)
(C)
(D)
6.

Simultaneously
Collectively
In correlation
Randomly

Which of the following risks are pure risks?

(Text 1.11)
(A)
(B)
(C)
(D)

Operational risk
Financial risk
Strategic risk
All of the above

7.
All of the following are financial consequences of risk for
individuals and organizations, EXCEPT:
(Text 1.13)
(A)
Expenditures on risk management
(B)
Cost of residual uncertainty
(C)
Expected cost of losses
(D)
Additional investment for profits
8.

What is residual uncertainty?

(A)
(B)
(C)
(D)

(Text 1.14)
Speculative risk that cannot be diversified
Pure risk that can be insured on an objective basis
Risk remaining after a risk management plan is
implemented
A technique to reduce expenditures on risk
management planning

Assignment 1
Introduction to Risk Management
1.
B is the answer. The definition of risk includes two
elements: uncertainty of outcome and possibility of a negative
outcome. A probability of negative outcome means that it is likely to
occur and is not the uncertainty associated with risk. Risk is the
possibility of injury or loss. Risk may or may not be quantified or
measurable.
2.
A is the answer. Speculative risk offers the chance of loss,
gain, or no loss. Pure risk only offers chance of loss or no loss.
3.
C is the answer. Risk managers have traditionally managed
the hazard risks that involve pure risks, not business risks that
involve speculative risks. Credit risk and liquidity risk are
speculative risks.
4.
B is the answer. People tend to overstate the probability of
deaths from an event that has severe effects such as an earthquake.
Media coverage can cause people to assign a higher probability of
deaths.
5.
D is the answer. Diversifiable risks tend to occur randomly,
without correlation. Risks that occur simultaneously tend to be nondiversifiable.

2016 Keir Educational Resources

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 2016 Keir Educational Resources

800-795-5347