CPCU cheat sheet

Risk is uncertainty about outcomes; pure risk involves only loss or no loss, while speculative risk can produce gain or loss.

Insurable risks generally meet criteria: accidental, measurable, definite, large number of exposure units, limited catastrophic potential, and economically feasible premium.

Hazards are conditions that increase loss frequency or severity: physical, moral, morale, and legal hazards.

The risk management process: identify exposures, analyze frequency and severity, select techniques, implement, and monitor.

Risk control techniques include avoidance, prevention, reduction, separation, and duplication; risk financing includes retention and transfer.

The law of large numbers improves loss predictability as the number of independent exposure units increases.

A risk matrix classifies exposures by frequency and severity; low-frequency/high-severity risks are candidates for insurance or transfer.

Enterprise risk management treats risk holistically across strategic, operational, financial, and hazard categories.

Ratemaking components: expected losses, loss adjustment expenses, underwriting expenses, profit and contingency allowance, and investment income offset.

Loss ratio = incurred losses and loss adjustment expenses / earned premium.

Expense ratio = underwriting expenses / written premium; combined ratio = loss ratio + expense ratio.

A combined ratio below 100% indicates underwriting profit; above 100% indicates underwriting loss.

The underwriting cycle alternates soft markets (low rates, broad coverage, high capacity) and hard markets (rising rates, restrictive terms).

Claims handling steps: report and verify, investigate, determine coverage, evaluate damages, negotiate, settle, and subrogate.

Premium audit determines final premium for exposure-based policies using actual payroll, sales, or other exposure units.

Regulatory solvency monitoring includes minimum capital, risk-based capital, reserve adequacy, and market conduct exams.

CGL occurrence form covers bodily injury or property damage that occurs during the policy period, even if claimed later.

CGL coverage A is bodily injury and property damage; coverage B is personal and advertising injury; coverage C is medical payments.

CGL exclusions include expected or intended injury, contractual liability (with exceptions), liquor liability, workers compensation, and pollution (with exceptions).

Products-completed operations covers BI/PD away from premises arising from products or completed work.

Commercial property coinsurance formula: (insurance carried / insurance required) × loss = recovery, subject to deductible and policy limit.

Business income coverage pays lost net income plus continuing expenses during restoration; extra expense pays costs to avoid or minimize shutdown.

Equipment breakdown covers loss from accidental breakdown of covered equipment, often excluded by property forms.

Workers compensation provides statutory benefits and employer liability coverage; exclusive remedy generally limits employee tort suits against employer.

Commercial auto liability covers BI/PD from covered autos; physical damage covers collision and comprehensive.

Homeowners Section I covers dwelling, other structures, personal property, and loss of use; Section II covers personal liability and medical payments.

HO-3 insures dwelling on open-perils and personal property on named-perils; HO-5 insures both dwelling and personal property on open-perils.

HO-4 tenants form covers personal property and liability, not the building; HO-6 condominium form covers unit improvements and personal property.

Personal auto policy parts: liability, medical payments/PIP, uninsured/underinsured motorists, collision, and other than collision.

Split liability limits state separate maximums per person and per accident; combined single limit states one maximum per accident.

PIP pays medical, lost wages, and other expenses regardless of fault in no-fault states; medical payments coverage pays medical expenses regardless of fault.

Collision covers damage from impact with another vehicle or object; other than collision covers theft, fire, hail, vandalism, and similar perils.

Standard homeowners policies exclude flood and earthquake; separate flood and earthquake coverage is required.

Written premium is premium charged on policies issued during a period; earned premium is the portion recognized over the policy term.

Unearned premium reserve is the liability for the unexpired portion of written premium.

Loss reserves estimate unpaid claims, including case reserves and IBNR.

IBNR represents incurred but not reported claims plus expected development on known claims.

DAC (deferred acquisition costs) capitalizes commissions and other acquisition costs and amortizes them over the policy period.

Policyholders' surplus = admitted assets − total liabilities.

Risk-based capital compares adjusted capital to a minimum requirement based on asset, underwriting, credit, and other risks.

Statutory accounting emphasizes solvency and conservatism; GAAP emphasizes matching and accrual reporting.

Retention is the amount of loss an organization keeps; transfer shifts risk to insurers or reinsurers.

Self-insurance is formal retention funded by reserves; a captive is a licensed insurer owned by a non-insurance parent.

Quota share: reinsurer assumes a fixed percentage of premium and losses for every covered policy.

Surplus share: reinsurer assumes losses above a retention on each risk, proportional to the amount of insurance above the cedent's retention.

Excess of loss per risk covers losses above a retention for each risk; per occurrence covers losses above a retention for each event.

Aggregate excess of loss covers total losses above a retention over a defined period.

Facultative reinsurance is negotiated for individual risks; treaty reinsurance automatically covers a defined class of business.

Reinstatement provisions restore reinsurance limit after a loss, often for additional premium.

Retrocession is reinsurance of a reinsurer's assumed risk.

SWOT analyzes internal strengths and weaknesses and external opportunities and threats.

Porter's five forces: rivalry, supplier power, buyer power, threat of new entrants, threat of substitutes.

PESTLE analyzes political, economic, social, technological, legal, and environmental factors.

Core competence is a distinctive capability that provides competitive advantage and is difficult to imitate.

Span of control is the number of direct reports per manager; narrow spans create taller hierarchies, wide spans create flatter structures.

Matrix structures combine functional and project reporting, creating dual authority and potential role conflict.

Agency theory addresses conflicts between principals (owners) and agents (managers), mitigated by incentives and monitoring.

Herzberg's two-factor theory separates hygiene factors (pay, conditions) from motivators (achievement, recognition).

The CPCU Code of Ethics requires integrity, competence, service to the public, and compliance with laws and regulations.

Fiduciary duty requires acting in the beneficiary's best interest and avoiding self-dealing.

A conflict of interest exists when personal or financial interests could impair objective professional judgment.

Informed consent requires disclosure of material facts, risks, costs, and alternatives before client agreement.

Confidentiality requires protecting nonpublic client information and sharing it only with authorization or legal obligation.

Fair dealing requires honest, clear communications and no misrepresentation of coverage, benefits, or costs.

Suitability requires matching a recommendation to the client's needs, objectives, and circumstances.

Ethical decision frameworks often weigh consequences, duties, fairness, and stakeholder interests.