ARM 54
Which one of the following statements is true with regard to a manufacturing company using call options to hedge the cost of a raw material?
Using call options may actually reduce the profitability of a transaction
Which one of the following is a characteristic that differentiates big data from traditional data?
Velocity
empirical probability distribution
a probability distribution found by counting actual occurrences of an event - they provide a mutually exclusive collectively exhaustive list of outcomes
One way of jointly considering frequency and severity is to combine both frequency and severity distributions into
a total claims distribution
Which one of the following risk identification techniques helps identify the interconnectedness of risk across organizational functions? A. process flow analysis B. checklists C. team approach D. threshold triggers
team approach
In the context of identifying loss exposures, hazard analysis is a method
that identifies conditions that increase the frequency and severity of loss
economic capital
the amount of capital required to maintain solvency at a given risk tolerance level
A risk map showing a large difference between inherent and residual risk indicates
the current risk treatment is effective
gap analysis
the organization's existing risk management framework and processes against a recognized risk management standard
Three main theoretical concepts explain how ERM works. One theoretical concept considers not only the combination of individual risks but also their interactions. This theoretical concept is
the portfolio theory
When examining a model's results, insurance and risk management professionals should defer to
their professional experience
A chart showing the probability of obtaining the numbers one through six on one roll of one die represents a
theoretical probability distribution
Investment income and interest earnings should be considered when analyzing which one of the following dimensions of loss exposures?
timing
Strategic Risk
uncertainty regarding the firm's financial goals and objectives - external to an organization
Solvency II aims to achieve consistency for insurers across Europe. Solvency II includes standards for which one of the following areas that was not addressed in Solvency I?
Risk management
Risk management reviews the cost of risk associated with protecting cash flows, assets, and personnel. Which one of the following statements best describes the key components of an organization's cost of risk?
Risk management department costs, retained losses, premiums, and risk control costs
As a best practice, a risk register should be an interactive company system. Which one of the following individuals should be responsible for continually updating risk information? A. risk owner B. customer C. risk management professional D. chief executive officer
Risk owner
In addition to analyzing individual risks, an organization can prepare a report to depict all of the organization's risk scenarios. This analysis provides a description of the risk, lists the risk owners, specifies the risk quadrants impacted by the risk, estimates the likelihood of loss and the resulting consequences, assigns a risk level, and specifies any improvements needed. This collection of reports on the individual risks is called
An organizational risk register
Earnings at risk are $200,000 with 90% confidence
Earnings at risk are projected to be less than $200,000 10% of the time
Accurate statement regarding pure and speculative risks
Every business venture involves speculative risks
Measure of the maximum potential damage associated with an occurrence?
Exposure
Every loss exposure has which one of the following elements? Choose one answer. A. Property exposed to loss B. Possibility of direct loss C. Financial consequences of loss D. Tangible asset exposed to loss
Financial consequences of loss
which one of the following best describes a result of an organization's adaptive strategy?
Gaining and maintaining a competitive advantage
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
Hazard Risk
decision tree vs. event tree
event trees analyze the consequences of accidental events rather than decisions
Every probability distribution includes the probability of
every possible outcome
Market value surplus
fair value of assets - fair value of liabilities
COSO 2004 originated with a focus on
financial risk
Which one of the following is a common example of unplanned retention?
flood losses
Inspections often identify loss exposures that a review of the written descriptions of the organization's operations would not revel. Which one of the following groups of individuals within the organization is best able to identify nonobvious loss exposures to a person conducting an inspection?
front-line personnel
Risk reports should be focused on business objectives as well as compliance with regulatory requirement. Reports should identify risks that are increasing or decreasing, risks that need immediate attention, and risks that require further analysis to determine their eventual affect on the organization. These characteristics of risk reporting demonstrate
functionality
Aspects of COSO framework's components that are particularly integral to an organization's achievement of enhanced value are
governance, strategy, and performance
To calculate the fair value of an insurer's reserves, estimated future amounts are discounted to present value and a
market value margin is added
A conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable.
risk control
Information used as a basis for measuring the significance of a risk is called
risk criteria
A conscious act or decision not to act that generates the funds to pay for losses or offset the variability in cash flows that may occur best defines
risk financing
The Basel I capital requirements differ from capital-to-assets ratios used prior to 2003 by
Considering the relative risk of the assets
A component that is a key feature of the COSO standard but not other risk management standards
Control activities
True statement about subjective and objective risk classifications
Subjective risk can exist even where objective risk does not
Why does a computer recursively apply a model?
To analyze different splits in the values of attributes
Real vs. Personal Property
an item may be real or personal property depending on the "attachment" criterion and other circumstances - trees in a yard = real & earrings = personal
Data credibility refers to the level of confidence that
available data can accurately indicate future losses
The process of evaluating alternative capital investment proposals in terms of the cash outlays that the proposals require and the present values of the cash inflows that the proposals are likely to generate is referred to as
capital budgeting
Example of exploratory data analysis
correlation matrix
Commercial Package Policy (CPP)
coverage for business property, liability, and business income
General Liability Insurance
covers the insured's legal defense costs when defending against a claim of liability
In theory, liability losses are limited only by the
defendant's total wealth
Jordan is risk manager of Burroughs Mills, a textiles and clothing company. Jordan just renewed the company's property insurance. The insurance that Jordan purchased on the company's warehouse covers all losses except those losses that are excluded. If a loss occurs, the insurer will take depreciation into consideration when determining the loss settlement. Which one of the following descriptions applies to the property insurance that Jordan purchased?
direct physical loss, actual cash value coverage
A group of large life insurance companies pooled their mortality data over the past 25 years. Based on the pooled mortality data, a mortality table showing the probability of death at specified ages was developed. The insurers used these probabilities in pricing life insurance products. The probabilities developed from the pooled mortality experience of the insurers are best described as
empirical probabilities
Assume that the expected safe life of a heating element for a particular type of furnace is 4,000 hours with a standard deviation of 200 hours, and that the expected safe life conforms to a normal distribution. If the maintenance schedule requires that the element be replaced after 4,000 hours, which one of the following represents the chance that the heating element will become unsafe before being replaced?
50% because 50% of the normal distribution is below that 4,000 hour mean
market value margin
Added to present value of liabilities to adjust the fair value of liabilities to calculate Market Value Surplus - an additional payment in case the reserves are inadequate
Which one of the following is one of the four components of the ERM framework? A. Align and Integrate B. Scan environment C. Treat risks D. Monitor and assure
Align and integrate
Risk manager, Mike Hadley needs to estimate the adverse financial affects on an organization due to a business interruption caused by an accidental loss. He could benefit from using which one of the following? A. income statement B. balance sheet C. organizational charts D. statement of cash flows
Balance sheet
A peer-to-peer method for performing any contract that establishes ownership of the property throughout its useful life and offers a simplified, efficient, transparent transaction that is permanently recorded and date-stamped in a distributed ledger is
Blockchain
Based on Basel III principles, which one of the following groups should take the lead in establishing a strong risk management culture?
Board of Directors
True about the basic measures that apply to risk management
Consequences measure the degree to which an occurrence could positively or negatively affect an organization
Jancy Manufacturing has experienced an increase in employee injuries over the last three years. Jancy's risk manager has met with the various stakeholders throughout the organization and has the support of senior management to design and implement risk management framework and process. Which one of the following individuals would be the best person to communicate Jancy's commitment to risk management and employee safety?
CEO
Compliance Review
Can help an organization identify loss exposures. The Compliance Review documents the results of regular process and system compliance assessments. In particular, it contains any identified deviations from compliance requirements, as well as measures to correct the situation.
An insurer can eliminate interest rate risk through
Cash matching
HAZOP
Hazard and Operability Analysis: 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
A significant difference between the Basel I regulatory capital requirements and the Basel II regulatory capital requirements is that Basel II
Includes a capital requirement for operational risk that Basel I does not include
The fundamental purpose of a risk management framework is to
Integrate risk management throughout the organization
The concept of correlation, in the context of why enterprise risk management works
Is the proposition that correlation increases risk while uncorrelated risks can reduce risk
Weakness of the Basel I methodology
It did not sufficiently account for systemic risk
what is a lift in evaluating a predictive model's effectiveness?
Lift is the percentage of a model's positive predictions divided by the percentage expected by chance
The relationship between which two basic measures is critical for risk management in assessing risk and deciding whether and how to manage it?
Likelihood and consequences
Which one of the following types of organizations would most likely be affected by commodity price risk? A. financial institution B. retailer C. hospital D. manufacturer
Manufacturer
Which one of the following statements is correct with respect to continuous probability distributions?
One way of presenting a continuous probability distribution is to divide the distribution into a countable number of bins
One quadrant includes such risks as loss of production due to a key supplier not delivering raw material or a mechanical breakdown of equipment
Operational risk
James is the risk manager for a large manufacturing organization with six locations. Each location has a plant manager who is responsible for the operation of that location. James feels that the plant managers are in the best position to identify and measure risk at their locations. He wants them to own the risk. However, he is looking for a tool that will allow him to prioritize risk according to the potential effect on the organization. James wants an interactive tool that will adequately identify the organization's risks, and allow them to be measured based on likelihood and the level of risk to the organization. What is the most appropriate tool for James
Organizational Risk Register
Which one of the following categories of operational risk includes many risks which are hazard risks or other forms of insurable risk? A. People B. Process C. Systems D. External events
People
Which one of the following components of the COSO framework refers to the practices that permit an org to continually and through all departments assess and respond to risk?
Performance
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, the risk of increased competition falls into the category of
Strategic risk
Which broad category of risk that an organization's board of directors must oversee includes risks that arise from trends in the economy or society?
Strategic risks
In 1999, the Basel Committee issued a proposal for a revised Capital Adequacy Framework which consisted of three pillars. One pillar is review of an institution's internal assessment process and capital adequacy. This pillar is
Supervisory
Risk that is common to all securities of the same general class and cannot be eliminated through diversification is called
Systematic risk
The Dodd-Frank Act, Solvency II, and Basel III all have the purpose of reducing
Systemic Risk
Under The Prouty Approach of analyzing loss exposures, the four broad categories of loss frequency and the three loss severity categories are
subjective
The BIS created a capital requirement for large, global, systemically important banks as part of its global liquidity framework under
The Basel III agreement
Which one of the following requires that financial bank holding companies and certain other public companies have a risk committee and at least one member of the committee must be a risk-management expert?
The Dodd-Frank Act
What act requires the CEO and CFO of a publicly-traded company to certify that financial statements are correct and requires that public companies report operational risk to the company's stakeholders?
The Sarbanes-Oxley Act
Which one of the following is the correct explanation of how expected accidental losses associated with a project should be considered when evaluating a capital budgeting project?
The expected accidental losses should be subtracted from cash revenues before taxes are considered
Risk Assurance
The level of confidence an organization places in the organization's risk management culture, practices, and procedures
The practice of using an organization's limited internal audit resources in those areas with the highest priority is called
risk-based auditing
In addition to document analysis, insurance and risk management professionals may also conduct compliance reviews to identify loss exposures. Which one of the following is a benefit of conducting compliance reviews? A. They are a practical means for identifying loss exposures B. They can prevent significant losses that the organization would otherwise incur C. They require infrequent monitoring D. thet are inexpensive to conduct
They can prevent significant losses that the organization would otherwise incur
Aligning risks with the organization's risk appetite defines
Tolerable uncertainty
Sean recently started a small consulting practice. Sean is the only employee of the business and the sole generator of revenue. Sean is very concerned that in the event that he becomes disabled due to an accident or disease there will be no revenue coming into the business. What is Sean's concern?
Tolerable uncertainty and earnings stability
Lucas is a building owner. His tenant has contractually agreed to indemnify him in the event that the Lucas is found legally liable for a bodily injury claim that occurs on the leased premises. Which one of the following is the term for this contractual agreement?
A hold-harmless agreement
Which one of the following is an example of a report that would most likely contain both quantitative and qualitative data? A. financial statement B. A disaster recovery plan C. a profit and loss statement D. a customer satisfaction survey
A customer satisfaction survey
Delphi Technique
A decision-making technique in which group members do not meet face-to-face but respond in writing to questions posed by the group leader.
Burt Wilson is a risk manager and has been hired by Cathy's Candies. Burt is extremely interested in learning about the candy making and distribution processes so that he can better identify and analyze the organization's loss exposures. Which one of the following tools will be the most beneficial to Burt in his attempt to identify key processes at Cathy's Candies locations? A. planning tree B. an organizational chart C. a flowchart D. an organizational blueprint
A flowchart
Estimates whose accuracy depends on the size and representative nature of the samples being studied are
empirical probabilities
Which one of the following types of financial risk has only negative potential? A. Price risk B. Market risk C. Credit risk D. Interest rate risk
Credit risk
Insurance Company monitors key indicators of underwriting effectiveness. Some indicators they monitor include: percentage of business quoted that was written, application processing time, premium volume handled by underwriters, skill level of underwriters, and benchmarking between different underwriting offices. The indicators of underwriting performance Insurance Company uses are called
Control Indicators
To an insured organization, what is an example of a cost of risk associated with an asset or activity?
Cost of sprinkler system
Which one of the following team approaches to risk identification involves a select group of experts in question-and-response cycles until a consensus is achieved? A. HAZOP B. scenario analysis C. Delphi technique D. SWOT
Delphi technique
The relationship between the expected value and the standard deviation of a normal distribution can have useful practical application. Which one of the following best describes such a practical application?
Determining a maintenance schedule for equipment that could become dangerous if it were to fail
Which one of the following is a way that insurers and risk managers can use data science to improve their results though data-driven decision making?
Discovering new relationships in data
Maria is a risk management professional trying to analyze workers compensation loss frequency by cause of loss. Which one of the following forms of probability distribution would be most appropriate for her to use? Choose one answer. A. Theoretical B. Discrete C. Cumulative D. Continuous
Discrete
A risk management professional should ensure that an organizational risk register has which one of the following characteristics? A. prioritizes risk based on historical losses B. provides interactive use for risk owners C. compiles documents from multiple projects D. includes only the most severe risks
Provides interactive use for risk owners
To determine the minimum amount of capital an insurer needs to support its operation given the insurer's risk characteristics, the National Association of Insurance commissioners developed its
Risk-based capital system
Blithe Manufacturing has experienced a drop in market share. The marketing department has come up with a way to differentiate their product in order to regain market share. Blithe has assembled a team of individuals representing different organizational functions to analyze both internal and external factors of the new product and decide whether or not it is feasible. Which one of the following team approaches to risk identification is Blithe using?
SWOT analysis
Which one of the following is one of the five steps of the ERM process model?
Scan environment
William works in the special investigative unit for Millstone Insurance. He has been working on a group of auto liability claims with multiple fraud triggers. William was able to trace links between the web pages of the lawyers and several medical care providers involved in the claims. Which analytical technique was used?
Social network analysis
Though risk assessment questionnaires have attributes, one weakness of standardized surveys is that they have
an insurance orientation
Which type of data is used to test a predictive model?
holdout data
one advantage of economic capital analysis is that
it focuses attention on the risks attached to each of an organization's activities
When compared to cash flow analysis for a proposal with no adjustment for uncertainty, a dollar amount assigned as the cost of uncertainty for the proposal will have which effect?
it will decrease the after-tax net cash flow
A branch of a classification tree that leads to a classification tree that leads to a classification of a target variable ends at a
leaf node
The more severe a loss tends to be, the
less frequently it tends to occur
The Prouty approach is a risk exposure analysis method that suggests how to treat loss exposures by classifying
loss frequency and loss severity into broad categories
When analyzing loss exposures, total dollar losses can be determined by multiplying loss frequency by
loss severity
When calculating the differential annual after-tax net cash flows for investment proposals, differential cash expenses that may be attributable to an investment proposal include such items as
maintenance and insurance expenses
The recognition of expected accidental losses in cash flow analysis
may have a significant effect on the decision to undertake a proposal
There are several steps in the enterprise-wide risk management process. One step includes determining the effectiveness of controls, observing changes in the internal and external environment, and obtaining information to improve risk assessments. This step in the ERM process is
monitor and assure
Of moral and morale hazards, which of the following is purposeful?
moral hazard
Driving carelessly or failing to lock an unattended building are examples of
morale hazard
This type of loss is considered an indirect loss
net income loss
One reason planned retention may be chosen as a risk management technique is because
no other alternatives are available
Systemic risks are generally
nondiversifiable
The formulas for calculating future and present value rely on several common variables. One of these common variables is the
number of times per year interest is paid
Basel I defined banks' capital based
on a core capital tier and a supplementary capital tier
Risk management programs should
operate economically and efficiently
Term used for an insurer's net worth under statutory accounting principles (SAP)
policyholders' surplus
One difference between theoretical probability distributions and empirical probability distributions is that for empirical probability distributions the
probabilities may change as new data are discovered
Example of an internal control at an organization which is a hard control
process checklist
Most general liability insurance policies include coverage for which one of the following?
product liability
Decision tree analysis and event tree analysis are similar in a number of ways, but differ in their
purpose
The sources and consequences of an identified risk are considered during which one of the following phases of the ISO 31000 risk management process?
risk analysis
reduced capital costs, more favorable business terms, and greater interdepartmental communication are all benefits of
risk assurance
The level of capital required to provide a cushion against unexpected loss of economic value at a financial institution is known as
risk capital
Which one of the following risk treatment techniques is used for residual risk after other techniques have been considered?
risk retention
Contractual agreements, such as hold harmless agreements, are an example of which of the following risk treatment techniques
risk transfer
For property, which one of the following causes of loss will most likely result in a total loss?
theft
The chief executive officer of GBB Company, in consultation with the head of the human resources department, decided to begin to offer off-site day care as an employee benefit for GBB employees. The risk manager learned of the day care operation two weeks after the service to employees had begun. he reviewed the company's liability insurance contracts and determined that the company had no coverage for liability arising out of the day care operations. This risk, as it was not identified and treated, is being handled through
unplanned retention
Investing in a company - volatility of investment - on any given day there is a 5% probability of losing more than 3% of the investment's worth. The statistic quoted is
value-at-risk
The descriptive approach is applied
when an insurer or risk manager has a specific problem
Scenario Analysis
windstorm is identified as 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.
