ARM 54 Practice Exam
Risks from accidental loss, including the possibility of loss or no loss defines
Hazard risk
A data analysis technique that an insurer would likely use to analyze claims adjusters' notes is
Text mining
The amount of capital a firm needs to remain solvent at a given risk tolerance level
Economic capital
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.
Risk management programs should
Operate economically and efficiently
Five steps of ERM model:
Scan environment/Identify Risks/Analyze Risks/Treat Risks/Monitor and Assure
Reduced capital costs, more favorable business terms, and greater interdepartmental communication are all benefits of which one of the following?
Risk assurance
Risk that is common to all securities of the same general class and cannot be eliminated through diversification is called
Systematic risk
Which one of the following statements is true regarding key risk indicators (KRI)?
A KRI must be leading, rather than lagging, to be effective.
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 Committee of Sponsoring Organizations of the Treadway Commission (COSO) grouped internal control objectives into three categories. One category of objectives deals with how well an organization meets numerous local, national, and international laws. This category of objectives is
Compliance objectives
Which one of the following is correct with respect to compliance reviews?
Compliance reviews can help an organization identify loss exposures
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework list five interrelated components of internal controls. Which one of the following components forms the basis for carrying out all of the organization's other functions?
Control environment
Which one of the following types of financial risk has only negative potential?
Credit risk
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?
Delphi technique
The process by which the present value is calculated is called
Discounting
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
Which one of the following provides a measure of the maximum potential damage associated with an occurrence?
Exposure
Which one of the following is a legal and regulatory concern in obtaining mass information from social media?
Privacy
The traditional definition of risk management reflects the traditional concept of risk as
Negative
Basel I defined banks' capital based
On a core capital tier and a supplementary capital tier
In risk mapping, which one of the following represents the level of risk that is within an organization's risk appetite?
Optimum risk
The cause of loss is also referred to as a
Peril
The Dodd-Frank Act, Solvency II, and Basel III all have the purpose of reducing
Systemic risk
Which one of the following statements is true regarding enterprise risk management (ERM)?
The ERM framework encompasses all stakeholders in the organization
Which one of the following is an objective and consistent measurement tool that can be used by organizations to conduct periodic self-assessments?
The Risk Maturity Model (RMM)
One way of jointly considering frequency and severity is to combine both frequency and severity distributions into
A total claims distribution
When training a predictive model, which one of the following is a reason for cross-validation to be used?
A very limited amount of training data is available, and the model's developers think it unwise to not use some of the data for training because of the need for holdout data
Which one of the following categories of operational risk includes many risks which are hazard risks or other forms of insurable risk?
People
Which one of the following components of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework refers to the practices that permit an organization to continually and through all departments assess and respond to risk?
Performance
Decision tree analysis and event tree analysis are similar in a number of ways, but differ in their
Purpose
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 statements is true regarding the evolution of risk and risk management?
The definition of risk has evolved to include positive as well as negative attributes
A risk management professional should ensure that an organizational risk register has which one of the following characteristics?
Provides interactive use for risk owners
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 as an outcome of risk defines
Risk financing
A matrix of the likelihood and potential impact consequences of the organization's risks is called a
Risk map
Which one of the following is a technique used to provide a visual perspective of an organization's risks and to prioritize those risks?
Risk mapping
As a best practice, a risk register should be an interactive computer system. Which one of the following individuals should be responsible for continually updating risk information?
Risk owner
The management team of a company decided that it made more sense for the organization to concentrate on critical operations and to outsource noncritical operations. Outsourcing noncritical operations is a form of
Risk transfer
A tool developed at the risk owner level that links specific activities, processes, projects, or plans to a list of identified risks and results of risk analysis and evaluation; and that is ultimately consolidated at the enterprise level is called a
Risk register
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
Which one of the following statements about event tree analysis is true?
Event trees analyze the consequences of accidental events
The weighted average of all the possible outcomes of a theoretical probability distribution is the
Expected value
Conrad Sales Company's vehicles are equipped with a device that allows them to locate each vehicle for tracking purposes. If a vehicle is stolen, the tracking devices can be used to recover the vehicle more quickly. Conrad Sales Company is using the risk management technique of
Loss reduction
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
Solvency II is a new regulatory standard in the European Union (EU) to establish principles for risk management and consistency in regulation for which one of the following industries?
Insurance
The fundamental purpose of a risk management framework is to
Integrate risk management throughout the organization
Major Corporation delivers its products nationally using its own fleet of vehicles that are specially designed to encapsulate and protect the cargo they are carrying. What risk management technique is being used?
Loss reduction
Because losses cannot be eliminated, an organization must decide whether to retain or transfer its loss exposures. Which one of the following describes losses which are typically retained?
Losses with low frequency and low severity
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-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.
Which one of the following is a common risk management benefit the entire economy would realize as a consequence of a risk management program?
Reduced waste of resources-Risk management reduces waste of resources. Allocating resources for potential losses is a cost because the resources cannot be used for other purposes that could promote growth.
Using existing processes is key to the successful integration of the risk management framework and process. Using existing processes serves which one of the following purposes?
Reduces the usual resistance to change from introducing new procedures
Steve is the chief legal counsel at Chemical Company. Gene, the company's risk manager, asked Steve to determine if the company is meeting all of its obligations—pollution standards, worker safety rules, employee benefit requirements, and other standards. This study of adherence to statutes and regulations is called
A compliance review
A process in which managers perform an annual self-audit of the level of confidence they have in the risk management culture, practice, and procedures in their area is called
A control risk self-assessment
Which one of the following is an example of a report that would most likely contain both quantitative and qualitative data?
A customer satisfaction survey
Currently, insurers process which portion of their available structured data?
A low percentage
Probability analysis is particularly effective for projecting losses in organizations that have
A substantial volume of data on past losses and fairly stable operations
Though risk assessment questionnaires have attributes, one weakness of standardized surveys is that they have
An insurance orientation
Helen is a member of ABC Insurance Company's board of directors. She chairs the audit committee and is a member of the risk management committee. Helen ordered a review of company policies and procedures to make sure ABC managers were complying with company guidelines. This review found that one person could write checks for claims under $500 without a second person signing-off on the payment. Although no losses occurred, the small claims payment procedure was modified so that a second person had to approve issuance of the check. The review that Helen ordered is called
An internal audit
A company's board of directors has several committees, including an audit committee. The primary role of the audit committee is to
Assure compliance with financial regulations and legal requirements
Data credibility refers to the level of confidence that
Available data can accurately indicate future losses
The most direct driving route between Bailey's home and the office where she works would require her to drive through a high-crime area. In the high-crime area, car jackings and drive-by shootings are common. Although it increases her travel time by 15 to 20 minutes in each direction, Bailey takes a longer route so that she does not have to drive through the high-crime area. Bailey is dealing with the risk of being injured while driving through the high-crime area through
Avoidance
Which one of the following documents would a risk management professional review to identify an organization's property values that are exposed to accidental loss?
Balance sheet
Which one of the following is a pure risk?
Being sued for $10,000 because of property damage
Commercial package policies typically include coverage for business property, liability, and
Business income
All of the following are correct with respect to the recognition of expected losses in the cash flow analysis of an investment proposal, EXCEPT:
Cash flow analysis adds the cost of expected losses to a proposal's initial investment in evaluating the net cash flow
In the context of a predictive model, a true positive results when the model
Correctly predicts a positive
Which one of the following is an example of exploratory data analysis?
Correlation matrix
Avoidance can be called proactive avoidance when the organization
Decides not to assume a loss exposure in the first place-When an organization identifies a loss exposure and consciously decides to not assume it by avoiding it, then the avoidance is considered proactive.
Brenda is the new risk manager at Telecom Company. She did a preliminary analysis to identify organizational risks. Brenda then scheduled a meeting of the organization's leaders, key employees, and other stakeholders. Brenda asked her assistant, Brian, to moderate the session since he is skilled in risk identification, and he is a skilled communicator as well. Brian encouraged brainstorming, and asked follow-up questions. After the session, Brenda and her risk management colleagues had a much deeper understanding of Telecom's risks. The technique that Brenda applied is called a
Facilitated workshop
Barney Farnsworth is unable to afford the proposed insurance premium to insure his hobby shop. Instead of purchasing insurance, Barney decides to set aside a specific amount of money which he will use in the event his property incurs losses. This risk management technique chosen by Barney is
Funded retention
Emma is a risk management professional at a chemical engineering organization. A new process is being designed and Emma has been told that all risks must be identified and eliminated during the design stage. Emma is a risk management professional, but not a chemical engineering expert. She has assembled a team of engineering experts and stakeholders to identify the risk associated with the process by subdividing the process into components and reviewing each component and then recommend solutions. Which one of the following team approaches to risk identification has Emma chosen?
HAZOP approach
The use of risk quadrants to identify and categorize risk provides a framework for
Holistic risk identification
When Courtney was a member of the Information Services department at ABC Company, she designed an electronic system to track all of ABC's accounting transactions. She was recently promoted to internal auditor of ABC Company. An obvious problem with Courtney's new position with regard to reviewing the accounting system she designed is
Independence
Tar-Con Company went through a reorganization last year. After the reorganization, a new department appeared on the organizational chart. The new department reports directly to the board of directors rather than to a company official. When asked what the role of the new department was, the president of Tar-Con said, "They are charged with evaluating how well we are achieving our business objectives." Although the members of the department are employees of the company, they operate independently of company management. The new department Tar-Con Company created is
Internal audit
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 correctly describes 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
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
Amanda is chief legal counsel at Insurance Company. The company's board wanted to make sure that the company's internal controls were current and working properly and they asked Amanda to review internal controls in each functional area. To test the system, Amanda had three fictitious claims submitted to the system for payment. Because the claims were not sufficiently documented, they were not paid and were flagged for investigation. Which component of the COSO framework for internal controls did Amada test?
Monitoring
One reason planned retention may be chosen as a risk management technique is because
No other alternatives are available-Planned retention is a deliberate assumption of a loss exposure that has been identified and analyzed by the organization. It is used because it is cost-effective or because it is convenient or because no other alternatives are available.
The use of risk quadrants to identify and categorize risk can provide a framework for risk identification. One quadrant includes such risks as loss of production due to a key supplier not delivering raw materials or a mechanical breakdown of equipment. This risk quadrant is
Operational risk
Liz Sellers owns a property that has below standard electrical wiring. Liz's insurer quoted a high premium to insure the property with current wiring and advised her that the premiums will be reduced once the property is upgraded to meet the current standards and building codes. Unable to afford the premiums, Liz has decided to forgo purchasing insurance at this time. Liz is setting aside some savings to address small losses. Liz has chosen which one of the following risk management techniques?
Planned retention
Which one of the following types of workers compensation claims are the most difficult for insurers to identify at the time of first report?
Potentially complex claims
Sharon wants to replace her computer in three years. She estimates that a new computer will cost $2,500. In order to determine the amount of money Sharon must invest today at a given rate to have $2,500 at the end of three years, she must calculate the
Present value of the amount needed in the future
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 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
An insurer wants to determine the complexity of a claim at the time of first report. Which one of the following is an important step after identifying the attributes of complex claims?
Ranking the attributes according to their relative information gain
If an insurer wants to determine the numerical value for a known target variable, it is most likely to use
Regression
The level of confidence an organization places in the organization's risk management culture, practices, and procedures is called
Risk assurance
To accurately determine its level of risk, an organization must examine the effectiveness of its efforts to prevent losses from occurring and to reduce the severity of losses that do occur. An organization's efforts in this area are called
Risk control
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 risk management program goals enhances an organization's reputation?
Social responsibility-Social responsibility is the risk management program goal that will most likely enhance an organization's reputation.
Which one of the following risk identification techniques helps identify the interconnectedness of risk across organizational functions?
Team approach
A risk map showing a large difference between inherent and residual risk indicates which one of the following?
The current risk treatment is effective
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
Which one of the following 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
Worthley's is a retail clothing store chain with 20 locations in the northeastern United States. Most of the stores are located in free standing buildings with parking lots. Wothley's has been experiencing an increase in the frequency and severity of general liability claims. Samuel, the risk manager, is in the early stages of designing and implementing a risk management framework and process. Which one of the following should be evaluated as part of Worthley's internal environment?
The experience level of employees at the various stores
Which one of the following is a speculative risk?
The risk of a wager at a casino
Which one of the following explains why a computer recursively applies a model?
To analyze different splits in the values of attributes
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
Which one of the following is a disadvantage of using loss histories to identify risks?
They are lagging rather than leading indicators of risk
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?
They can prevent significant losses that the organization would otherwise incur.
Which one of the following is a responsibility of internal auditors?
To validate that internal controls are in place, functioning, and meeting design objectives
Devin chairs the audit committee of XYZ Insurance Company's board of directors. He is the retired chief financial officer of LMN Insurance Company. The other members of XYZ's board, other than the chairman, know little about insurance company accounting. At a recent board meeting, Devin challenged the vice president of accounting and finance, saying, "Can you provide more background in your report to the board? I understand why the ratio of net premiums written to surplus is important, but not everyone on the board may grasp the significance. Please be a little more cognizant of your audience when reporting to the board." Which communications goal was Devin attempting to assure?
Transparency
An analysis that identifies mathematical patterns in past losses and then projects these patterns into the future is
Trend analysis
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
Not defined and does not follow a specified format
Unstructured data
The descriptive approach is applied
When an insurer or risk manager has a specific problem.
In Fred's large landscaping business, he knows that there is a point where equipment becomes unsafe and difficult to maintain. Fred realizes that after 2,000 miles of use, his costs for maintenance on his large mowers and sod busters dramatically rise. Using probability analysis Fred can better know
When to replace equipment
A main difference between decision trees and event trees is
hat event trees analyze the consequences of accidental events rather than decisions
Which one of the following statements is true regarding event tree analysis?
Event tree analysis typically provides only two options, success or failure
Many organizations are required to have an external auditor verify their financial statements. The external auditors also test financial reporting systems and internal controls to check that the systems are reporting transactions correctly. The approval of a company's financial statements by an external auditor is
Report certification
Insurance Company (IC) sells its coverages through independent insurance agents. Independent agents represent several insurance companies. Tom, the president of IC, has learned that the independent agent who is the highest producer for IC is considering selling his agency. IC is considering acquiring the agency since Tom is concerned that if the agency is sold, IC may lose a substantial amount of business. Tom asked IC's risk manager to analyze the prospective purchase. The analysis revealed that the acquisition would likely secure most of IC's book of business with the agency but also revealed local competitors that would try to place the business as well. In addition, the analysis revealed the opportunity for IC to move some accounts currently placed with other insurers over to IC. Also, it was learned that a competitor expressed an interest in the agency acquisition. The analysis performed by the risk manager is a form of
SWOT analysis
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
One category of operational risk that a business must manage is risk associated with people. One of the strategies to mitigate people risk is to use care when hiring employees. This strategy employs background checks, pre-employment tests, and checking references. This strategy is
Selection-Using care when hiring people by performing criminal background checks and checking references is part of the selection process.
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 one of the following analytical techniques is William using?
Social network analysis
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
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
Which one of the following groups of individuals within an organization is responsible for establishing effective internal controls to monitor risk?
Management
Which one of the following statements about standards—risk management, Solvency II, and Basel II and III— is true?
Many risk management standards, such as ISO 31000, are voluntary
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
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
Myers Metal Company is a diversified organization with operations in the U.S., Europe, South America, and Africa. The company operates mines, metal foundries, and steel plants. The previous risk manager was fired and a new risk manager was just hired. The chief executive officer, chief financial officer, and company controller met with the new risk manager and asked her to design and implement an enterprise risk management (ERM) program. At the meeting, both the CEO and CFO expressed concern about acceptance of the new ERM approach. The risk manager suggested that a representative of the company should announce the change in risk management philosophy and attempt to get workers and managers to accept the new approach. Which one of the following officials would be best-positioned to announce the new approach and attempt to gain acceptance of it?
Chief executive officer (CEO)
A predictive approach to data analytics involves
Providing a method to be used repeatedly to provide information.
Northeast Urban Properties owns and operates office buildings in New York, Boston, and Philadelphia. The risk manager decided to examine the impact of potential terrorist attacks on each building. For example, for the Philadelphia building, the risk manager examined attacks at three levels: scare (e.g. suspicious package), minor explosion or gas attack, and large-scale attack. For each level, the risk manager listed the risk owners, the risk quadrants impacted, the likelihood of attack, the consequence, the risk level, and the risk control measures that needed to be implemented. This information was summarized in a one-page chart. The chart the risk manager prepared is a
Risk register with scenario model
At each board of directors meeting at XYZ Insurance Company, each vice president gives a report on his/her area. Darlene is the Vice President of Investments. During one portion of her presentation, she reviews whether the portfolio is in compliance with each of the company's investment guidelines (e.g. no more than 15% of the portfolio may be invested in equities, no more than 2% of the portfolio may be invested in securities issued by the same company, all bonds must be investment grade, etc.). The reporting format that Darlene uses for this portion of her presentation is called a
Scorecard
A disadvantage of value-at-risk (VaR) is that VaR
Does not accurately measure the extent to which a loss might exceed the threshold-VaR gives the probability but does not accurately measure the dollar value by which a loss might extend beyond the VaR threshold.
Selecting the appropriate risk management techniques is based on which one of the following?
A forecast of the frequency and severity of expected losses
Which one of the following types of organization would most likely be affected by commodity price risk?
A manufacturer
The market value surplus of an insurer is equal to the fair value of assets minus the present value of liabilities plus the market value margin. The market value margin is
An additional payment in case the reserves are inadequate.
Which one of the following organizations would most likely be able to compete effectively during financial crises?
An organization with large cash reserves
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-Basel III is a comprehensive set of reform measures to strengthen the regulation, supervision, and risk management of the banking sector. Based on Basel III principles, the board of directors should take the lead in establishing a strong risk management culture.
Carol has worked as a payroll clerk for a small organization for 20 years. Over the years she received only two small salary increases and began to embezzle funds from the company since she felt she was not adequately compensated for her job efforts. In terms of the quadrants of risk, Carol's theft risk can be classified as
Both a hazard risk and an operational risk-Carol's theft risk can be classified as both a hazard risk and an operational risk.
Loss severity is usually measured in terms of
Dollars
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?
Chief Executive Officer
Cromley Department Store has 30 stores located throughout the United States. An increase in the frequency and severity of general liability claims over the last three years has encouraged Cromley's risk manager to design and implement a risk management framework and process. Cromley has decided to replace the carpeting at several locations, purchase additional storage equipment, and train employees on premises safety. Cromley is in which one of the following stages of designing and implementing a risk management framework and process?
Commitment of resources
The Basel I capital requirements differ from capital-to-assets ratios used prior to 2003 by
Considering the relative risk of the assets-The Basel I requirements consider the relative risk of the assets
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-The insurer's risk correlation will most likely increase as a result of this marketing decision.
To an insured organization, which one of the following is an example of a cost of risk associated with an asset or activity?
Cost of sprinkler systems
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
Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification?
Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk-Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk.
A group of female employees at Third Federal Bank filed a lawsuit against the bank. The lawsuit alleges that the bank consistently failed to promote qualified women to senior management positions because of their gender. If the lawsuit is successful, which one of the following coverages would pay the damage award?
Employment practices liability insurance
Carmen is the risk manager of Brighton Software Company (BSC). She was directed by the president of the company to implement an enterprise risk management (ERM) program. Carmen called a meeting of the lead person in Brighton's finance, safety, accounting, and legal areas. She explained the concept of ERM at the meeting, and asked for cooperation. After the meeting, she encountered resistance from these leaders. The chief financial officer said, "Don't tell me how to do my job." The head of accounting said, "We've managed credit risk just fine without your help, why don't you stick to insurance." The lack of cooperation, despite repeated appeals, lead to the failure of the ERM program. In this case, the implementation of an ERM program was not successful because of
Failure to integrate the program with existing processes
Market value surplus (MVS) of an insurer =
Fair value of assets - Fair value of liabilities
George works for a large company and part of his job is to monitor assets according to their liquidity. George is particularly concerned that the company fleet cars are affecting its liquidity and rising fuel prices are having an adverse effect during tight economic markets. If George's concerns were categorized as causes of loss according to the quadrants of risk, his concern most directly relates to which one of the following types of risks?
Financial risks
Which one of the following best describes a result of an organization's adaptive strategy?
Gaining and maintaining a competitive advantage
An organization is reviewing the tenure of its board members and contemplating a rotation to refresh the decision making process. This action is related to which Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework component?
Governance and culture
Aspects of The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework's components that are particularly integral to an organization's achievement of enhanced value are
Governance, strategy, and performance
Fire, wind, theft, business interruption, sickness and disability, and liability claims are all considered
Hazard risks-Fire, wind, theft, business interruption, sickness and disability, and liability claims are all considered hazard risks.
A U.S.-based athletic apparel company has manufacturing plants in the Pacific Rim. Its major product markets are the U.S., Canada, and Europe. The company would like to develop a risk management program for its supply-chain risk. A recognized international standard for this purpose is
ISO 31000
Which one of the following statements is true regarding the International Organization for Standardization's ISO 31000 standard?
ISO 31000 applies regardless of whether the risk has positive and/or negative consequences
Which one of the following was considered a weakness of the Basel I methodology?
It did not sufficiently account for systemic risk
One advantage of economic capital analysis is that
It focuses attention on the risks attached to each of an organization's activities
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.
Elliott is the new risk manager of Consolidated Agriculture Products. The company has corporate farms that grow grain in six Midwestern states. The company trades futures contracts on grain and foreign currencies. In an effort to establish accountability in the enterprise risk management program Elliott is implementing, he is using financial measures to determine potential losses from property damage, liability claims, farming operations, grain futures trading, currency futures trading, and each of the other loss exposures the company faces. These metrics of potential losses are called
Key risk indicators
The president of Agricultural Products Company (APC) told the risk manager, Tom, to implement an enterprise risk management (ERM) program. Tom was a "traditional" risk manager who had managed APC's property, liability, and personnel-related risks for the last 12 years. Under the new plan, he was supposed to manage commodity price risk, currency exchange rate risk, and strategic risk. When Tom asked for assistance (hiring an outside expert, time to get up to speed on financial risk, etc.), his requests were denied. After six months, the president declared the ERM program a failure and told Tom to revert to the previous risk management plan. APC's experiment with ERM was not successful because of
Lack of commitment of resources
Four components of the ERM model:
Lead and establish accountability/Align and Integrate/Allocate Resources/Communicate and Report
An organization must meet the standard of care that it owes to others in order to ensure that
Legal obligations are satisfied-An organization must meet the standard of care that it owes to others in order to ensure that legal obligations are satisfied.
The changing risk landscape many companies are recognizing as significant leads to
Leveraging enterprise risk management (ERM) to prepare for and respond to risks.
Jim's Crab Hut restaurant has just added an extra seating section. The restaurant's risk manager is extremely concerned with the fact that this section requires customers to take a small step down to enter the section and it may be easy to miss the step and fall. This exposure of concern to the risk manager is a
Liability loss exposure
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
The purpose of all workers compensation laws is to provide
Medical and wage replacement benefits to injured employees
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 enterprise risk management process is
Monitor and assure
Tania has been unemployed for six months, and her unpaid bills are mounting. She recently damaged the front fender of her vehicle after running off the road. When seeking repairs to the vehicle, she convinced the auto body shop to include damages from previous incidents in the estimate. This would allow her to collect extra money from her insurer. From an insurance and risk management perspective, Tania's behavior is indicative of a
Moral hazard
As the risk manager for Alpha Corp, Ann Marie recommended that Alpha should follow an international risk management standard and framework. Which one of the following describes risk management standards developed by recognized authorities?
Organizations follow risk management standards voluntarily
Jack has recently been hired as a risk management professional for Blithe Corporation. Blithe has a risk management program in place, but Jack has advised senior management that he would like to design and implement a risk management framework and process based on a recognized international standard. Which one of the following is the first step that Jack should take in designing and implementing the new framework and process?
Perform a gap analysis
Jemma has two pairs of earrings she wants to ensure against theft. Jemma's earrings are categorized as
Personal property
An evolving trend in risk management is to
Prepare for unknown risks
Most general liability insurance policies include coverage for which one of the following?
Product liability
Sydney's Paint and Body Shop has experienced an increase in its volume of business as well as an increase in inventory, supplies, and transactions. Sydney has not hired additional employees, nor have his profits substantially increased but he has noticed more clutter around the paint shop in terms of oily rags, supplies, paint, and waste. If Sydney viewed his business in terms of risk exposures, the exposures he would be most concerned about would be the
Property loss exposures
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
Based on the ISO 31000 definition of risk assessment, which one of the following steps includes determining the level of risk and its potential effects on the organization?
Risk analysis-Risk analysis is the step of risk assessment that includes determining the level of risk and its potential effects on the organization.
According to Basel III principles, senior management is responsible for consistently implementing and maintaining the organization's policies, processes, and systems used to manage operational risk throughout the bank in a manner consistent with the bank's
Risk appetite and tolerance
The ISO 31000 Standard provides risk management principles, a framework, and a process. One part of the process includes risk identification, risk analysis, and risk evaluation. This part of the process is
Risk assessment-The ISO 31000 risk assessment includes risk identification, risk analysis, and risk evaluation.
The level of capital required to provide a cushion against unexpected loss of economic value at a financial institution is known as
Risk capital-The level of capital required to provide a cushion against unexpected reduction in the value of its capital is known as risk capital.
A conscious act or decision not to act that reduces the frequency and severity of losses or makes losses more predictable best defines
Risk control
Information used as a basis for measuring the significance of a risk is called
Risk criteria
Information used to evaluate the significance of an organization's various risks is known as
Risk criteria
Integration of the management principles governing the organization with the risk management process is
Risk governance
The structure that supports the organization's risk management objectives and strategies is the
Risk management framework
Which one of the following steps in the enterprise-wide risk management process includes an evaluation of how each of the organization's risk management processes aligns with its overall objectives?
Scan the environment
Imposing higher standards of insurer risk management and governance is considered one of the three pillars of which one of the following regulatory standards?
Solvency II
Which one of the following statements is true regarding strategic risks?
Strategic risks are external to an organization.
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 is essential to an effective risk management program?
Support of the organization's senior management-Support of the organization's senior management is essential to an effective risk management program.
One benefit of risk management to the economy is the reduction of the potential for a major disruption in the functioning of financial markets and the financial system. This risk that is reduced is called
Systemic risk
Which one of the following commonly used categories of operational risk includes risks associated with technology and equipment?
Systems-Systems risk includes risks associated with technology and equipment.
When implementing an enterprise risk management program, it is common to perform a gap analysis. Gap analysis compares
The organization's existing risk management framework and processes against a recognized risk management standard
Three main theoretical concepts explain how enterprise risk management (ERM) works. One theoretical concept considers not only the combination of individual risks but also their interactions. This theoretical concept is
The portfolio theory
According to the law of large numbers, as the number of exposure units insured increases,
The relative accuracy of predictions about future losses increases-According to the law of large numbers, as the number of exposure units insured increases, the relative accuracy of predictions about future losses increases.
Which one of the following is considered a clear indication of senior management's commitment to risk management?
The willingness to allocate the necessary resources
An additional payment in case the reserves are inadequate
arket value margin
Pacific Pine is a forest products company based in the state of Washington. Pacific Pine harvests timber on six large tracts of land they own. Most of the wood harvested is shipped to countries in the Pacific Rim. A key economic risk that Pacific Pine faces is that one or more of the Pacific Rim countries will impose a fee on imported wood to protect domestic lumber companies. Such a fee is called
tariff
