Free CPCU Practice Questions

Correct answer: D - Strategic risk

Strategic risk arises from external competitive, reputational, or strategic-decision threats that affect an organization's ability to achieve its long-term objectives and market position. Hazard risk involves pure loss exposures such as fire, theft, or liability. Operational risk arises from internal process, people, or system failures. Financial risk involves market, credit, liquidity, or asset-price movements. Competitive disruption from a rival's product launch is a textbook strategic risk because it threatens market position and long-term value, not internal operations or financial assets directly.

Correct answer: C - Quota share treaty

Quota share reinsurance, a proportional treaty that cedes a fixed percentage of every premium and every loss, immediately provides surplus relief - one of the six functions of reinsurance - by transferring unearned premium reserve liability to the reinsurer. This directly improves the premium-to-surplus (Kenney) ratio. Per-risk and catastrophe excess of loss treaties protect against loss volatility but transfer little unearned premium and provide minimal surplus relief. Facultative reinsurance covers individual risks and is too narrow and slow to materially shift a portfolio-level leverage ratio. Surplus relief is the specific reinsurance function tied to improving leverage ratios.

Correct answer: B - Estoppel

Estoppel applies when one party's conduct induces another to reasonably rely on a representation, and the relying party would be harmed if the conduct were reversed. By repeatedly accepting late premiums without objection across three policy periods, the insurer's conduct led the insured to reasonably believe late payment would not void coverage; the insurer is therefore estopped from now enforcing strict timeliness. Waiver requires a voluntary and intentional relinquishment of a known right and is harder to prove on these facts because the insurer's intent is not explicit. Reasonable expectations addresses ambiguous policy language. Contra proferentem construes ambiguous language against the drafter; both are textual doctrines, not conduct-based ones. The waiver-versus-estoppel line is heavily tested.

Correct answer: D - $240,000

Under modified comparative negligence with a 50% bar, a plaintiff is barred from any recovery if their fault equals or exceeds 50%. Because the plaintiff here is 40% at fault - below the threshold - recovery is permitted but is reduced by the plaintiff's percentage of fault: $400,000 × (1 − 0.40) = $240,000. Option A would be correct only under contributory negligence, which is followed in only four U.S. jurisdictions. Option B incorrectly multiplies damages by the plaintiff's fault percentage rather than reducing damages by it - a frequent calculation error. Option C is the result of a 50/50 split that does not match the facts. Comparative-negligence mechanics are tested across CPCU 530 and 552.

Correct answer: B - 95.0%

The statutory combined ratio is the sum of the loss ratio and the expense ratio, where the loss ratio uses earned premium in the denominator and the statutory expense ratio uses written premium in the denominator. Loss ratio = $780M ÷ $1,200M = 65.0%. Expense ratio = $390M ÷ $1,300M = 30.0%. Combined ratio = 65.0% + 30.0% = 95.0%. A combined ratio below 100% indicates an underwriting profit. Option A is only the loss ratio. Option C ($97.5%) results from incorrectly using earned premium in the expense-ratio denominator ($390M ÷ $1,200M = 32.5%) - the most common candidate error on this concept. The denominator difference between the loss ratio (earned) and the statutory expense ratio (written) is a heavily tested distinction.

Correct answer: A - The 2023 occurrence policy only

An occurrence-basis policy responds based on when the bodily injury or property damage occurred, regardless of when the resulting claim is later made. Because the negligent work and the resulting damage occurred in October 2023 - within the occurrence policy's period - the 2023 policy responds even though the lawsuit was not filed until March 2024. The 2024 claims-made policy will not respond because its retroactive date of January 1, 2024 excludes any injury or damage that took place before that date; the October 2023 incident is therefore prior to the retro date and outside the claims-made policy's trigger. Pro-rata allocation between an occurrence form and a claims-made form is not the standard approach when triggers do not overlap. The distinction between the occurrence trigger (when injury or damage happens) and the claims-made trigger (when the claim is reported, subject to the retroactive date) is one of the most heavily tested concepts in commercial liability.

Correct answer: C - Part D - Other Than Collision (Comprehensive)

Under Part D of the Personal Auto Policy, 'Collision' is defined as the upset of the auto or its impact with another vehicle or object that the auto strikes. Damage from a falling object - such as a tree branch, hail, or a falling rock - striking the auto is treated as Other Than Collision (commonly called Comprehensive), not Collision. Part A responds only to third-party bodily injury or property damage liability, and the insured is not legally liable here. Part C responds when an at-fault uninsured motorist causes injury or damage; no other motorist is involved. The simple test - does the auto strike the object (Collision), or does the object strike the auto (Other Than Collision)? - is the iconic Part D distinction tested in CPCU 555. Falling trees, falling rocks, hail, vandalism, and animal collisions all fall under Other Than Collision.

Correct answer: B - $295,000

The coinsurance penalty applies because the insured did not carry the limit required by the coinsurance clause. Required limit = $2,000,000 × 80% = $1,600,000. The insured carried $1,200,000, so the coinsurance fraction is $1,200,000 ÷ $1,600,000 = 0.75. Applying the standard recovery formula: (Limit Carried ÷ Limit Required) × Loss − Deductible = 0.75 × $400,000 − $5,000 = $300,000 − $5,000 = $295,000. Option C ($395,000) ignores the coinsurance penalty and simply subtracts the deductible from the loss - a common error when candidates do not check whether the insured met the coinsurance requirement. Option D ignores both the penalty and the deductible. Option A is the result of an incorrect coinsurance fraction. Coinsurance penalty calculations are a fixture of CPCU 551 exams.

Correct answer: B - Fair Credit Reporting Act (FCRA)

The Fair Credit Reporting Act (FCRA) requires that when an 'adverse action' - including charging a higher rate based in whole or in part on information in a consumer report - is taken against a consumer, the user of the report must provide an adverse-action notice. That notice must identify the consumer reporting agency that supplied the report, inform the consumer of their right to a free copy of the report, and inform them of their right to dispute the report's accuracy. GLBA governs financial-privacy notices and opt-out rights for sharing nonpublic personal information with non-affiliates, but it does not require adverse-action notices. The NAIC AI/ML Model Bulletin (2023) sets governance expectations for insurers using AI/ML systems and is regulatory guidance, not a statutory adverse-action requirement. McCarran-Ferguson preserves state regulation of the business of insurance and does not address consumer-report adverse actions.

Correct answer: C - Report the matter to the Board of Ethical Inquiry

Under the CPCU Code of Professional Ethics, a CPCU has an affirmative duty to report apparent material violations of the Code to the Board of Ethical Inquiry (BEI), the body responsible for investigating alleged violations and recommending sanctions ranging from admonition through revocation of the designation. The conduct described - twisting and misrepresentation to induce replacement, particularly involving elderly clients - is a clear violation of multiple canons addressing fairness, honesty, and the integrity of professional relationships. Option A is incorrect because the duty to uphold the Code's integrity does not depend on personal involvement in the misconduct. Option B may be appropriate as a collegial first step in some situations but is not a substitute for reporting material violations to the BEI. Option D would risk further harm to the clients and is not the agent's role; investigation and remediation are the BEI's function. The duty to report to the BEI is one of the most distinctive features of the CPCU Code.