Practice Exam 1
After an organization develops and implements its strategic plan, it needs to determine how risk taking will be controlled. Which one of the following statements is correct with respect to risk taking?
A factor in strategic decision making is whether an organization has an advantage in controlling risk with a given activity.
Which one of the following is an internal source that can often provide information regarding risks that aren't obvious?
Internal auditing
Directors' and officers' fiduciary duties include the duty of
Obedience
Before speaking with a group or individual, the speaker should think about what he or she wants the other person(s) to do as a result of the conversation. Which one of the following steps in the communication process does the speaker complete by doing this?
Set a clear communication objective
Which one of the following is a pre-loss action for the flood cause of loss?
Stock disaster supplies
Some buildings have modest economic value but still have high replacement costs. One prime reason for this might be because of
Construction styles that are large or ornate.
A risk manager and safety engineer need to consider which one of the following interdependent elements when evaluating the premises condition?
Construction, occupancy, protection, and external exposures
Which of the following risk management program goals is an essential goal for all public entities?
Continuity of operations
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.
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?
Correlation
Which one of the following analysis methods concentrates on an organization's competitive environment?
Porter's Five Forces analysis
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
Preventive analytics
A company's management team is preparing to conduct a SWOT analysis as part of its strategic management process. Which one of the following questions can the management team expect to answer as a result of the SWOT analysis?
Will this organization's current business strategies still allow it to achieve its goals, or is a change required?
When assessing strategic risk, which one of the following represents the amount of risk an organization is willing to take on in order to achieve an anticipated result or return?
Risk appetite
The level of confidence an organization places in the organization's risk management culture, practices, and procedures is called
Risk assurance.
Which one of the following statements is true regarding sources of risk affecting property exposures?
Risk control techniques can usually manage the likelihood and consequences of human risk sources to some extent.
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
A strategic risk.
The predictive approach to data-driven decision making would be most appropriate for which one of the following situations?
A transportation company is looking for a way to optimize routes and improve fuel efficiency.
After meeting with an external expert on climate change, an organization's risk professional will need to do all of the following, EXCEPT:
A. Assess the potential severity of the risks to the organization B. Communicate all of the potential risks cited by the external expert to the board of directors C. Identify those risks that are most likely to affect the organization D. Recommend a treatment technique for risks with severe potential
After being promoted to a supervisory position, Henry decided that he needed to work on becoming an active listener. All of the following are elements of active listening, EXCEPT:
A. Attention B. Introduction of new ideas C. Suspension of judgement D. Response
Ideally insurable loss exposures are subject to losses that
Are definite in time, cause, and location.
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
Artificial intelligence.
Disaster recovery plans for windstorms should reflect not only weather conditions, but also the difference in
Warning times.
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
A special purpose vehicle.
Which one of the following statements is true if earnings at risk are $200,000 with 90% confidence?
Earnings at risk are projected to be less than $200,000 10% of the time.
Motley Manufacturing is considering locating one of its facilities in northern California, but is concerned about the possibility of loss due to which one of the following natural hazards, which has one of the highest loss exposures for this phenomenon in this part of the country?
Earthquake
Creative Catering has a 15 year old vehicle that was originally built to prepare and serve sandwiches and drinks at various outdoor functions such as car shows, sporting events, etc. The vehicle is of low value but it generates approximately $100,000 a year in sales. The risk management professional will primarily be concerned about its
Economic value.
Hanna is preparing her presentation for a meeting. She has a very specific objective which has been shared with the audience. Hanna wants to include several slides in her presentation because she has read that people tend to learn more from presentations that are accompanied by visual aids. Hanna should use the slides to do which one of the following?
Emphasize key points
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.
Estimates whose accuracy depends on the size and representative nature of the samples being studied are
Empirical probabilities.
When communicating a decision up the organization's chain of command, consulting with outside experts can help a risk management professional do which one of the following?
Enhance stakeholders' confidence in the process
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
Ergonomics
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
Ergonomics.
Hugh was recently hired as a risk manager for Malvern Manufacturing. He is preparing for his first presentation to the employees working on the manufacturing floor. Hugh realizes that he needs to establish credibility with the audience in order to be persuasive. He decides that he will tell a couple of stories about how he has dealt with similar situations in the past. Which one of the following modes of persuasion is Hugh using?
Ethos
Which one of the following statements is true regarding event tree analysis?
Event tree analysis typically provides only two options, success or failure.
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
Hazard and operability (HAZOP) study.
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?
Hazard risks
Which one of the following is an example of a wearable?
Helmets that monitor fatigue
One example of a noninsurance risk financing transfer is a
Hold-harmless agreement.
The use of risk quadrants to identify and categorize risk provides a framework for
Holistic risk identification
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
Home Houseware's financial position as of the balance sheet date.
An empirical probability is based on
historical data
One of the four characteristics that affects an individual's susceptibility to injury or death from a building fire is
Awareness of the fire.
Insurance deals primarily with
Pure risks.
One of the reasons that building occupancies affect life safety is that different occupancies have different
Features that affect safe exit from a building.
Vandenberg Company retains workers compensation medical expenses. The risk manager ran a regression using workers compensation medical costs as the dependent variable and company payroll (in actual dollars) as the independent variable. Results of the regression were: y = .098 x + 5.20 Next year's payroll is expected to be $3,750,000. As medical costs continue to rise at a rate higher than inflation, the risk manager would like to adjust the expected medical costs upward by 10%. Based on this information, what are the expected workers compensation medical costs for next year?
$404,256
The theoretical probability of a head on a coin toss is 50%. Based on the law of large numbers, which one of the following is the number of coin tosses most likely to result in an empirical frequency of 50% receiving a head on a coin toss?
100
The number of auto physical damage claims for fleet vehicles at Right-a-Way Delivery Service in any year is normally distributed. Next year, the expected number of fleet vehicle physical damage claims is expected to be 712 with a standard deviation of 25. Based on this information, what is the probability that between 737 and 762 auto physical damage claims will occur next year?
13.6%
If in calculating the mean, the outcomes are 2, 2, 5, 5, and 6, the mean is
4
Which one of the following statements is true regarding key risk indicators (KRI)?
A KRI must be leading, rather than lagging, to be effective.
Directors and officers are considered to have met their duty of care if they have met two different standards. Which one of the following is one of these standards?
Act in a manner believed to be in the corporation's best interests
Corporate directors are considered to have met their duty of care if they
Act in good faith and in a manner they reasonably believe to be in the best interests of the corporation.
Which one of the following is a major benefit that blockchain technology provides to holistic risk management?
Because of their security, blockchains can eliminate the need to verify the accuracy of risk management data.
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
Credit risk.
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
Credit risk.
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?
Current ratio
When organizations invest their assets among a mix of stocks and bonds from companies in different industry sectors they are using the risk management technique of
Diversification
Aligning risks with the organization's risk appetite defines
Tolerable uncertainty.
Decision tree analysis and event tree analysis are similar in a number of ways, but differ in their
purpose
Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures?
A common function that insurance provides is a spreading of risk across a large number of similar exposure units within the same period.
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
A negative covariance.
Classifying risk appropriately can help in managing risk. Which one of the following statements is correct with respect to the classifications of risk?
A pure risk is a chance of loss or no loss, but no chance of gain.
Which one of the following statements about root cause analysis (RCA) is true?
A root cause must produce effective recommendations for prevention of future accidents.
Lucas, a risk professional for Jones Incorporated, recently met with experts from the utility industry to discuss the potential loss of supply and risks to the infrastructure. Lucas must now decide which risks, and proposed treatments, need to be communicated to the board of Jones Incorporated. Lucas should make this decision based on
A. The organization's risk appetite and tolerance levels
One of the characteristics of individuals and groups of individuals that affects susceptibility to injury or death caused by a building fire is
Age
Which one of the following statements is true concerning robotic process automation (RPA)?
Although RPA can help control some organizational risks, use of RPA can create other risks.
Which one of the following statements is true regarding an effective risk reporting system?
An effective reporting system provides efficient information flow up and down the lines of authority.
Risk management professionals must collaborate with data analysts during which two steps of the risk management process?
Analyze risks and monitor risk treatments
During which one of the following stages of the strategic management process would an organization use methods such as Porter's Five Forces Analysis and PESTLE Analysis?
Analyzing Environments
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
Artificial intelligence.
The board of directors of Insurance Company wants assurance that the company's recently-instituted "commitment to risk management" has been communicated to and accepted by all company employees. Which one of the following would be the best method to determine if employees had been informed of the commitment to risk management and had accepted it?
Ask the internal audit department to administer a risk management questionnaire to employees.
The basic accounting equation on which the balance sheet is structured is
Assets = Liabilities + Net Worth
The balance sheet provides a snapshot of an organization's financial condition
At a given point in time.
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
Avoidance
Event trees show the results of a progression of decisions.
Event trees analyze the consequences of accidental events.
Big data includes
Both structured and unstructured data.
Which one of the following statements about event tree analysis is true?
Event trees analyze the consequences of accidental events.
Under a large deductible plan, the amount that the insurer incurs to adjust losses
Can be inside or outside the deductible.
Shelton Manufacturing executives are growing increasingly concerned about wildfires and the potential effects on supply chain management. As the risk professional, Carla has been asked to meet with experts on the subject and report back to the executive team. Which one of the following should Carla do before meeting with external wildfire experts?
Carla should research the field and get a working understanding of wildfires.
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
Catastrophe management.
Which one of the following statements is accurate regarding pure and speculative risks?
Every business venture involves speculative risks.
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
Exchange-rate risk.
Which one of the following provides a measure of the maximum potential damage associated with an occurrence?
Exposure
Technological advancements have led to access to unprecedented volumes and types of data. Social media posts are an example of which one of the following types of data?
External unstructured data
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?
Financial risk
The fundamental purpose of a risk management framework is to
Integrate risk management throughout the organization.
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
Interest rate risk.
Insurance and risk management professionals use measures of dispersion of the distributions of potential outcomes to gain a better understanding of loss exposures being analyzed. Which one of the following is true regarding the standard deviation of a distribution?
It indicates how widely dispersed the values in a distribution are.
Certain types of property losses such as drought, flood, and earthquake are referred to as natural because
It is beyond human control.
Which one of the following describes the law of large numbers?
It states that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes also increases.
Which one of the following is a benefit of the conditional value at risk (CVaR) method?
It takes into account the extremely large losses that may occur.
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?
Job safety analysis
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?
Large number of similar exposure units
An organization must meet the standard of care that it owes to others in order to ensure that
Legal obligations are satisfied.
Which one of the following is the initiating event in an event tree analysis?
Lightning strikes a warehouse building while it is closed for the weekend
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 is an example of a noncurrent liability?
Long-term notes payable
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?
Predictive technique
A predictive approach to data analytics involves
Providing a method to be used repeatedly to provide information.
Risk appetite is an important component of strategic risk management (SRM). Which one of the following statements is correct with respect to an organization's risk appetite?
Regulatory conditions, political risks, and anti-trust or other legal concerns can reduce an organization's risk appetite.
In order to achieve collaboration, group leaders must
Remain focused on preventing stakeholders from straying from the common goal.
Asking a question such as "How do you think this will work out?" can help a speaker do which one of the following?
Request feedback and determine if the message has been understood
Concerning fundamental guidelines of contractual risk transfer management, it is wise to
Require a certificate of insurance for contractual liability before contract operations begin.
A large deductible is similar to a self-insured retention (SIR) in that both
Require the insured organization to retain a relatively large amount of loss.
Strategic risk can be created and affected by external factors or internal factors. Which one of the following is considered an internal factor?
Resource allocation
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
Robots
A systematic procedure that uses the results of other analysis techniques to identify the predominant determinants of an accident is called
Root cause analysis.
Which one of the following is a tool that can be used by fraud investigators to compare documents and analyze notes?
Text mining
A data analysis technique that an insurer would likely use to analyze claims adjusters' notes is
Text mining.
A main difference between decision trees and event trees is
That event trees analyze the consequences of accidental events rather than decisions.
From a system safety perspective, change analysis is an analysis
That projects the effects a given system change is likely to have on an existing system.
Which one of the following statements is true about an organization's balance sheet?
The balance sheet shows the financial position of a business on a specific date.
Which one of the following is the goal with strategic risk?
The goal is to use information about strategic risks to make informed decisions that optimize the risk-reward ratio.
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?
The new production machine
One of the ways in which probabilities can be developed is theoretically. Which one of the following is an example of an event for which probability can be determined theoretically?
The number of times heads can be expected to turn up over multiple coin tosses
Which one of the following statements is true regarding a generic model of a securitization?
The organization sells income-producing assets to an SPV in exchange for cash.
Which one of the following statements is true with regard to linear regression analysis?
The regression line represents the "best fit" of a straight or smoothly curved line to actual historical data from prior periods.
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 one of the following statements is true regarding the risk involved in George's options?
The rental property presents both pure and speculative risk; property values may increase, and the building could burn down.
Which one of the following statements is true regarding the strategic management process?
The strategic management process can be applied to any type of organization, including business, not-for-profit organizations, and government entities.
Clark's Electronics is considering launching new technology for the medical industry. Before investing major resources in the project, the company decided to perform a SWOT analysis. The fact that there are new medical industry regulations pending would fall under which one of the following quadrants of a SWOT analysis?
Threats
Buildings constructed of reinforced concrete have been successful withstanding this disaster, but building all structures in this manner is neither practical nor economical. This statement pertains to which one of the following disasters?
Tornado
Widget Manufacturing Company has noticed that its loss frequency and severity has increased in the past two years as its production has increased. In order to better forecast loss frequency and severity, Widget Manufacturing Company should consider using
Trend analysis identifies patterns in past data and then projects these patterns into the future. In order to better forecast loss frequency and severity, Widget Manufacturing Company should consider using trend analysis.
An analysis that identifies mathematical patterns in past losses and then projects these patterns into the future is
Trend analysis.
Partridge Office Supplies has a history of theft losses. During the last three years, Partridge has expanded its hours of operation to remain open 24 hours a day, 7 days a week. Partridge has also begun to carry a line of computer equipment, including small portable accessories such as flash drives, USB converters, and wireless accessories. Based on Partridge's loss history, the most appropriate forecasting technique is
Trend analysis.
Data analytics is especially useful for
Unstructured data
Tania works in the fraud unit for Greatview Insurance. There is a claimant who appears to be involved in multiple cases of insurance fraud. Tania decides to use social media to obtain information that may be used to develop a profile of the claimant. Tania's use of social media is an example of which one of the following types of data?
Unstructured external
Widget Manufacturing board of directors recently adopted a zero-risk tolerance for work place accidents. Initially the chief risk officer thought this was a great idea, however, he has found it very hard to implement. One reason that a zero-risk tolerance policy is hard to implement is because zero-risk tolerance
Will typically result in risk-based decisions that are too rigid and counter-productive.
Probability analysis would be most reliable for projecting losses in an organization
With a substantial volume of data on past losses.
InterMountain Railroad carries logs, lumber, plywood, and other forest products in a six-state region in the Western part of the United States. InterMountain self-insures its derailment cargo losses. The risk manager at InterMountain ran a regression using ton-miles (one ton of cargo carried one mile) as the independent variable and dollar losses as the dependent variable. The independent variable is in units per 10,000 and the dependent variable is per 1,000. The resulting regression equation is: y = 2.65 x + (−13.8) Next year, InterMountain estimates that it will record 5,000,000 ton-miles of shipments. Given a building materials shortage, projected for next year, the cargo will be more valuable, so a 12% increase in value factor should be applied to the dollar loss estimate. Based on this information, what are InterMountain's final expected derailment cargo losses for next year, rounded to the nearest $10?
$1,468,540 y-intercept = −13.8; slope = 2.65; y = (2.65 × 500) + (−13.8) = 1,311.2; 1,311.2 X 1.12 = 1,468.54; 1,468.54 X 1,000 = 1,468,540. InterMountain's final expected derailment cargo losses for next year are $1,468,540.
Magruder Company would like to estimate the number of workers compensation claims to expect next year. Magruder's risk manager ran a regression analysis in which the number of workers compensation claims was the dependent variable and the number of payroll hours worked (in thousands) was the independent variable. The y-intercept from the regression was 3.8. The slope coefficient was 1.4. The risk manager believes that next year Magruder workers will work 80,000 payroll hours. Based on this information, approximately how many workers compensation claims should the risk manager expect next year?
116
Assuming a normal distribution, 34.13% of all outcomes are within one standard deviation above the mean. If the portion of the distribution between one and two standard deviations above the mean contains 13.59% of all outcomes, what percentage is contained in the area between the mean and two standard deviations below the mean?
47.72%
An insurer is beginning to write business in a new state. The claim manager, Carla, wants to know how many new claim representatives to hire to accommodate the additional volume of claims. Based on the marketing department's estimate and industry data, Carla has determined the mean number of new claims to be 2,000, with a standard deviation of 1,000 in a normal distribution. If a claim representative can typically adjust 600 claims per year, and Carla wants at least 80 percent certainty that she has enough representatives, which one of the following represents how many representatives she will need to hire?
5
Devon Company has noticed that the number of workers compensation claims each year at the company is normally distributed. If the predicted value of workers compensation claims for next year is 320 with a standard deviation of 30, what is the expected probability that between 290 and 350 workers compensation claims will occur?
68.3%
In a normal distribution, fewer than 5% of outcomes are
Outside two standard deviations above or below the mean.
An organization can use securitization to exchange
Income-producing assets for cash.
Which one of the following risk control techniques might actually increase loss frequency?
Separation
An example of a post-loss action for the windstorm cause of loss is
Patrolling premises to prevent looting or vandalism.
Hi-Tech Phones has been working on two new models of their flagship smart phone. The Research and Development department has been working on a touch-based phone and a voice-activated phone. Which one of the following is a tool that could be used to assess the risks of developing and marketing either or both of these phones?
A risk map.
Risk indicators such as experience and authority levels apply to which one of the following operational risk classes?
People
A financial analyst wants to evaluate the effect that a predicted increase in the cost of steel will have on the net income of East Side Manufacturing. Which one of the following measurement techniques should the analyst use?
Earnings at risk
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?
Biochemical sensors.
Three HillsLaw is a legal firm specializing in multiple-plaintiff cases. One current case involves alleged birth defects caused by exposure to polluted groundwater. There are currently 78 plaintiffs represented in the pending legal action. Up-to-date records on the condition of each child is a critical operational concern. Three HillsLaw turned to a secured digital ledger system in which independent third parties (nurses, physicians, and parents) can update the status of individual children, and the record for the entire group is automatically updated. The latest update showed seven children have died, 14 have a terminal diagnosis, 27 have permanent disabilities, and 30 cases are listed as "developing" (awaiting definitive diagnosis). The secured distributed ledger system used by Three HillsLaw is called
Blockchain
Which one of the following technologies can provide the infrastructure upon which smart contracts are built and implemented?
Blockchain
Which one of the following statements about blockchain is true?
Blockchain stores a record of transactions across a network of servers.
Which one of the following is an example of exploratory data analysis?
Correlation matrix
An analysis that projects the effects a given system change is likely to have on an existing system is known as
Change analysis.
Determining earnings-at-risk (EaR) entails modeling the influence of factors such as
Changes in the prices of products and production costs on an organization's earnings.
Tom, the regional manager at Westfork Mutual, has planned a community service day for all employees. He has asked his two assistant managers, Julian and Leah, to spread the word to other employees and encourage them to attend. Based on centrality measures of the company's email traffic, Tom is confident that Julian will spread the word to more employees more quickly through email than will Leah. Tom's confidence is based on Julian's high score in which one of the following centrality measures?
Closeness
Nancy, the general liability claims manager, is concerned about a significant rise in claim frequency in the state of New Jersey during the past 18 months. She cannot identify the cause of the increase and has asked James, a data analyst, to help. James decides to develop a model to analyze the dataset of New Jersey claims, and see if any previously unknown grouping can be identified for further analysis. Which one of the following data analysis techniques is James using?
Cluster analysis
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
Computer vision.
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
Connected ecosystem.
Conor needs to deliver an important message to his staff. He has scheduled a meeting in a conference room with his staff of 10 individuals. Which one of the following is the best way for Conor to use his body language to convey confidence in his message and interest in his staff?
Conor should sit up and lean slightly toward the audience.
Which one of the following statements is true regarding the basic measures that apply to risk management?
Consequences measure the degree to which an occurrence could positively or negatively affect an organization
An important liquidity measure for a business is its working capital. Working capital is equal to
Current assets minus current liabilities.
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?
Diversification
Which one of the following statements about the use of drones is true?
Drones may be equipped with cameras that relay data in real-time.
An organization may use a large deductible plan to achieve the purpose of which one of the following?
Defer cash outflows for retained loss reserves.
One type of noninsurance risk control transfer, a disclaimer of warranties, is used to
Deny any express warranties made in conjunction with the sale of property.
Samuel was recently hired as a risk management professional for Parker Property Management. He has been asked by senior management to review the organization's current insurance policies to make sure that the organization is adequately protected, and also see if there are any opportunities to save on the premiums. Samuel must do which one of the following through internal communication before he will be able to complete this task?
Determine the organization's risk appetite
Gaining a holistic perspective requires
Developing a thorough understanding of each unit's role and how it supports or depends on other units and stakeholders.
Which one of the following is a way that insurers and risk managers can use data science to improve their results through data-driven decision making?
Discovering new relationships in data
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?
Inadequate training
Taylor owns Paoli Hardware, a mid-sized hardware store with 25 employees. Paoli Hardware has won best local hardware store 3 years in a row. Taylor would like to expand operations and has undertaken a SWOT analysis. His most dedicated customers are generally over 40 years old and engaged in small house projects, but his biggest revenue generator continues to be the sale of lumber. He would like to obtain more commercial customers and increase lumber sales. One of the major complaints Taylor hears from his customers is the difficulty finding local contractors. So, he is considering hiring a general contractor at the store who would also make house calls to assist customers. This will allow him to bill for labor and increase the sale of his products, but he is concerned it may increase his insurance claims and premiums. One of the younger store employees suggested they create a website to expand sales to on-line purchases and target electronic advertisements to commercial accounts. Taylor is not sure that he has the expertise to maintain a website and run the store. The employee claims to know a company that can maintain a website for Paoli at minimal cost. Taylor believes the website is a good idea and will increase sales of lumber. To protect Paoli from increases in the cost of lumber, Taylor is considering a forward contract with the lumber yard. If Taylor completed a PESTLE analysis instead of a SWOT analysis, the PESTLE analysis would include which one of the following?
Increase in competition
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?
Internet of Things
The four SWOT headings are strengths, weaknesses, threats and
Opportunities
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?
Liquidity 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
Loan defaults are likely to be highly correlated.
Which one of the following statements is correct regarding formulating an organization's long-term strategies?
Long-term strategies to improve performance and/or create a competitive advantage, are based on the organization's goals and analysis of internal and external environments.
Which one of the following is a risk control technique that reduces the frequency of a particular loss?
Loss prevention
Which one of the following risk control techniques is generally used to reduce the frequency of a particular loss?
Loss prevention
A risk control technique that reduces the frequency of a particular loss is
Loss prevention.
Which one of the following valuation standards is most appropriate for valuing products that are relatively indistinguishable from one another, such as agricultural products, oil, or precious metals?
Market value.
If an organization directly securitized its income-producing assets without using a special purpose vehicle (SPV) as an intermediary, investors
Must consider the overall credit risk of the organization.
The traditional definition of risk management reflects the traditional concept of risk as
Negative
Which one of the following statements about the balance sheet is correct?
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.
Which one of the following is a data analysis technique that operates in a way similar to the human brain?
Neural networks
Olivia is planning a meeting to explain a new cyber security procedure. She expects that the meeting will be impeded by hidden agendas. Which one of the following is the best way for Olivia to deal with potential hidden agendas?
Olivia should start the meeting by asking participants to state their concerns or feeling about the procedure.
Which one of the following statements is true regarding operational risk?
Operational risk is integrated in every activity of an organization.
Which one of the following statements is true with regard to preventive analytics?
Preventive analytics uses smart products and data analytics to identify root loss causes and their implications.
Advancements in machine learning and artificial intelligence (AI) have helped insurers do all of the following, EXCEPT:
Price insurance policies more precisely B. Completely prevent customers' risk C. Customize policies to more closely align with customers' actual risk D. Deliver policy information and payment options to a mobile device
Which one of the following statements regarding probability is correct?
Probabilities associated with events such as coin tosses can be developed from theoretical considerations and are unchanging.
One category of operational risk includes procedures and practices organizations use to conduct their business activities. This category is
Process 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?
Production-based RCA
Which one of the following is a technique that can destroy motivation, rather than build it?
Promoting competition among units
Hank has determined the expected number of workers compensations claims in a given year. Hank next calculates the standard deviation of potential outcomes. Calculating the standard deviation
Provides a measure of how sure Hank can be in his estimate of claims.
Erin is a project manager at Shelton Manufacturing. She is responsible for a major project that will require the collaboration of many different groups. Erin needs to motivate everyone from the sales force and support team, to the suppliers, production lines, and logistics teams to achieve the goal by July 1st. Which one of the following is key in order for Erin to achieve this collaboration?
Putting the desired result at the forefront and making sure that everyone knows what group success looks like.
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
Qualitative assessment.
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?
Quantitative analysis
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
Quantitative analysis.
Which one of the following risk management objectives is critical for a manufacturer seeking new capital from investors, stockholders, and creditors?
Reduce the deterrent effects of hazard risks
If an insurer wants to determine the numerical value for a known target variable, it is most likely to use
Regression
Chuck is Vice President of Claims for Insurance Company. The company has 37 adjusters in the field, and needs to hire four new adjusters. Chuck is curious about the relationship between prior experience of the adjuster and policyowner complaints. He collected data on the number of complaints for each adjuster on staff over time. Then he used a statistical technique to analyze the relationship between adjuster experience and complaints, and the trend of the relationship over time. The statistical analysis confirmed that that there were significantly fewer complaints with more experienced adjusters, and that the relationship grew stronger with more years of experience. The technique Chuck used to relate indicators to outcomes is called
Regression analysis.
Julian was having a conversation with Tania, one of his employees. At one point, Julian said, "What I hear you say is that you would like to take on more responsibility. Is that correct?" Which one of the following elements of active listening was Julian illustrating?
Response
Owners' equity represents the capital contributed by an organization's owners plus the organization's
Retained earnings.
Tom Werkmann has been named risk manager for Metroville, a small Midwestern town. In order to address municipal human resource risk, Werkmann will have to review and address
Retirement and resignation.
Which one of the following is the first step in the text mining process?
Retrieve and prepare text with preprocessing techniques
In workplace settings, the distinction between injuries and illnesses is relevant because
Risk controls are different for injuries than for illnesses.
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?
Risk has different meanings within the risk management and insurance communities.
Internet of Things (IoT) devices, sensors, wearables, and telematics devices have had the greatest impact on which one of the following risk treatment techniques?
Risk modification
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
Risk presented by the income-producing assets held as collateral by the SPV
The difference between risk tech and insurtech is
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.
Which one of the following statements is correct with respect to risk tolerance?
Risk tolerance levels can have high-end thresholds, low-end thresholds, or both.
Local Petroleum Distributors (LPD) sells gas and diesel fuel to 72 independent gas stations and convenience stores. Receiving accurate data on the fuel needs of its customers is a critical operational concern. LPD installed sensors in the fuel storage tanks owned by each customer. At 11 PM each evening, the sensors send fuel data electronically to LPD. LPD receives the data, and a computer enters each record. The data are analyzed, and the analysis determines which retailers require a fuel shipment in the next three days. The electronic system has increased operational efficiency as shipments can be better coordinated, and retailers are no longer required to measure the fuel level and report manually. LPD's use of a computer to enter the data reported by the sensors is an example of
Robotic process automation.
Which one of the following is one of the five steps of the risk management process?
Scan environment
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?
Scenario analysis
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
Scenario analysis.
The process of creating a marketable investment security based on the expected cash flows from a financial transaction is
Securitization.
Which one of the following is a major benefit that smart insurance contracts can provide to insurance customers?
Smart contracts can dramatically increase the speed of loss payments.
Which one of the following risk management program goals enhances an organization's reputation?
Social responsibility
Which one of the following is the most intangible and abstract of the four risk quadrants?
Strategic risk
Strategy development is an important element of the strategic management process. Which one of the following statements is correct with respect to strategy development?
Strategies should reflect an understanding of the business, including its identity, customers, and purpose.
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
The Delphi technique.
Taylor owns Paoli Hardware, a mid-sized hardware store with 25 employees. Paoli Hardware has won best local hardware store 3 years in a row. Taylor would like to expand operations and has undertaken a SWOT analysis. His most dedicated customers are generally over 40 years old and engaged in small house projects, but his biggest revenue generator continues to be the sale of lumber. He would like to obtain more commercial customers and increase lumber sales. One of the major complaints Taylor hears from his customers is the difficulty finding local contractors. So, he is considering hiring a general contractor at the store who would also make house calls to assist customers. This will allow him to bill for labor and increase the sale of his products, but he is concerned it may increase his insurance claims and premiums. One of the younger store employees suggested they create a website to expand sales to on-line purchases and target electronic advertisements to commercial accounts. Taylor is not sure that he has the expertise to maintain a website and run the store. The employee claims to know a company that can maintain a website for Paoli at minimal cost. Taylor believes the website is a good idea and will increase sales of lumber. To protect Paoli from increases in the cost of lumber, Taylor is considering a forward contract with the lumber yard. When Taylor completes his SWOT analysis in which quadrant of the SWOT analysis will he place reputation?
Strengths
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
Subjective risk.
Which one of the following commonly used categories of operational risk includes risks associated with technology and equipment?
Systems
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
Technique of operations review (TOR) approach.
Precision Electronic Components manufactures circuit boards, microchips, and other electronic products. Given the precision necessary for their products, the manufacturing environment must be controlled. Temperature, humidity, static electricity and other factors must be monitored. After losing several batches of products due to human monitoring failures and imprecise adjustments, the company moved to a system of sensors. The sensors monitor and regulate temperature, humidity, static electricity, and other factors. The sensors transmit data to and from each other, and the manufacturing environment is continuously adjusted to assure production is successful. The network of sensors transmitting data and the autonomous corrective actions without human interaction is called
The Internet of Things.
Which one of the following statements about risk management monitoring and reporting is true?
The most important characteristic of a risk report format is that it is useful to the user.
Taylor owns Paoli Hardware, a mid-sized hardware store with 25 employees. Paoli Hardware has won best local hardware store 3 years in a row. Taylor would like to expand operations and has undertaken a SWOT analysis. His most dedicated customers are generally over 40 years old and engaged in small house projects, but his biggest revenue generator continues to be the sale of lumber. He would like to obtain more commercial customers and increase lumber sales. One of the major complaints Taylor hears from his customers is the difficulty finding local contractors. So, he is considering hiring a general contractor at the store who would also make house calls to assist customers. This will allow him to bill for labor and increase the sale of his products, but he is concerned it may increase his insurance claims and premiums. One of the younger store employees suggested they create a website to expand sales to on-line purchases and target electronic advertisements to commercial accounts. Taylor is not sure that he has the expertise to maintain a website and run the store. The employee claims to know a company that can maintain a website for Paoli at minimal cost. Taylor believes the website is a good idea and will increase sales of lumber. To protect Paoli from increases in the cost of lumber, Taylor is considering a forward contract with the lumber yard. Which one of Porter's Five Forces is most greatly affected by Paoli's ability to negotiate a forward contract with a lumber supplier?
The suppliers bargaining power to drive prices up.
Regression analysis assumes that the variable being forecast
Varies predictably with another variable.
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?
Vehicle telematics
Which one of the following is a characteristic that differentiates big data from traditional data?
Velocity
The risk management professional for a large multi-location super market chain in the New England area observed that all of the buildings have a flat roof. His concern is primarily due to the possible loss resulting from
Weight of snow, sleet, and ice.
Which one of the following statements is correct regarding the challenges of delivering messages to internal and external stakeholders?
When addressing individuals of different status levels, it is best to ask for ideas from lower-level persons before turning to those of higher standing.
Management of LMN Insurance Company is considering investing in the Stability-Growth Mutual Fund; however they are concerned about the volatility of the investment. The fund's manager said that on any given day, there is a 5% probability of losing more than 3% of the investment's worth. The statistic quoted by the fund manager is
value at risk
