ARM 54 practice questions
Mega-Pharma is a large drug company. After several claims were made that its hypertension drug Menivex caused heart damage, Mega-Pharma immediately withdrew Menivex from the market and ceased production of the drug. In this case, Mega-Pharma dealt with the risk of additional product liability claims by using
Avoidance.
Loss reduction reduces
Loss severity.
One category of operational risk includes procedures and practices organizations use to conduct their business activities. This category is
Process risk.
A predictive approach to data analytics involves
Providing a method to be used repeatedly to provide information.
Reference standards, measures, or expectations used in judging the significance of a given risk in context with strategic goals are called
Risk criteria.
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.
In the context of identifying loss exposures, hazard analysis is a method
That identifies conditions that increase the frequency or severity of loss.
The COSO Enterprise Risk Management Integrated Framework is designed to help an organization achieve its objectives in four categories. One category is the effective and efficient use of company resources. This category is the
operations category
A tool for communicating the risk management objectives and how the objectives will be achieved is known as a
policy statement or comprehensive plan
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 practice of using an organization's limited internal audit resources in those areas with the highest priority is called
risk-based auditing
Be-Ne-Lux Insurance is an insurer operating in Belgium, the Netherlands, and Luxembourg. Be-Ne-Lux is subject to the Solvency II standards. Company managers believed the company was adequately financed, however it was determined that the company did not have adequate assets based on the uncertainty of its operating performance. The standard that Be-Ne-Lux failed to meet is
risk-based capital
Three Hills Insurance had a problem with predicting which workers compensation claims would develop into long term disability claims. The data science team decided to use a classification tree technique to develop a predictive model based on the attributes of long term disability claims. The availability of light duty work was determined to be the most informative attribute. Which one of the following parts of the classification tree should be assigned to this attribute?
root node
Which one of the following federal laws passed in 2002 requires CEO's and CFO's to certify the accuracy of the corporation's quarterly and annual financial reports?
sarbanes oxley act
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
Under the Prouty Approach to analyzing losses, there are four categories of loss frequency and three categories of loss severity. Which one of the following is a loss severity category
significant
Joe wants to have $40,000 available to make the down payment on a house three years from now and has decided to set aside part of an inheritance he just received to achieve that goal. If Joe can earn 5% interest on a bank certificate of deposit, how much of the must he set aside today in order to have $40,000 three years from now?
$34,554
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
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 66% certainty that she has enough representatives, which one of the following represents how many representatives she will need to hire?
5
Assume that the length of time a heating element can operate safely conforms to a normal distribution with a mean of 5,000 hours and a standard deviation of 1,000 hours. If the element is replaced after 5,000 hours, which one of the following represents the chance that the heating element will become unsafe before being replaced? A: 70 percent B: 50 percent C: 40 percent D: 20 percent
50 percent
Assume that the expected safe life of a heating element for a particular type of furnace is 4,000 hours with a standard deviation of 200 hours, and that the expected safe life conforms to a normal distribution. If the maintenance schedule requires that the element be replaced after 4,000 hours, which one of the following represents the chance that the heating element will become unsafe before being replaced?
50% because 50% of the normal distribution is below the 4,000 hour mean
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.
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.
Probability analysis is particularly effective for projecting losses in organizations that have
A substantial volume of data on past losses and fairly stable operations.
A mortgage lender may compare the number of delinquent mortgage loans to the total number of loans outstanding. If the percentage exceeds a specified percentage, for example 10 or 20%, that may indicate that lending practices are too risky. This technique for identifying loss exposures is using
An escalation or threshold trigger.
Vandenberg 's risk manager uses regression analysis to determine the relationship between Vandenberg's workers compensation medical expenses (the dependent variable) and its payroll (the independent variable). The formula for Vandenberg's linear regression line is y = 5.20 + .098 (x). Next year's payroll is estimated to equal $3,750,000. Based on this information what are Vandenberg's estimated workers compensation medical expenses next year? A: $367,495 B: $367,500 C: $367,505 D: $375,520
C 367,505
Jancy Manufacturing has experienced an increase in employee injuries over the last three years. Jancy's risk manager has met with the various stakeholders throughout the organization and has the support of senior management to design and implement risk management framework and process. Which one of the following individuals would be the best person to communicate Jancy's commitment to risk management and employee safety?
CEO
Disbursements for assets that will be consumed over a relatively long period, usually over multiple accounting periods, are referred to as
Capital expenditures.
In the context of a predictive model, a true positive results when the model
Correctly predicts a positive.
General liability insurance
Covers the insured's legal defense costs when defending against a claim of liability.
Data credibility refers to the level of confidence that
Data credibility refers to the level of confidence that
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 relationship between the expected value and the standard deviation of a normal distribution can have useful practical application. Which one of the following best describes such a practical application?
Determining a maintenance schedule for equipment that could become dangerous if it were to fail
Which one of the following statements is accurate regarding pure and speculative risks?
Every business venture involves speculative risks.
A net income loss exposure is a condition that presents the possibility of loss caused by a reduction in net income. In a given time period, net income equals revenue minus
Expenses and income taxes.
Recent trends in government regulations have instituted more formal requirements for the board of directors of organizations. This is especially true for organizations involved in which one of the following?
Financial services
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
Which one of the following is correct regarding insurers' and risk managers' internal data?
Insurers and risk managers have vast quantities of internal data they have not used
The fundamental purpose of a risk management framework is to
Integrate risk management throughout the organization.
In calculating the present value of a stream of equal future payments, which one of the following is true?
It is equal to the sum of the present values of each of the separate payments.
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.
Insurance companies use a number of measures to track their operating performance. One measure employed compares the amount the insurer has paid in losses to the premiums it has earned. This measure is the insurer's
Loss ratio.
The traditional definition of risk management reflects the traditional concept of risk as
Negative.
The mean is calculated by weighting each observed outcome by the
Relative frequency with which it occurs.
Risk financing techniques can be classified into the two main groups. One of the two main groups is
Retention.
Which one of the following statements is true regarding strategic risks?
Strategic risks are external to an organization.
Determining the premium for an applicant for personal auto insurance involves
Supervised learning.
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 regarding the coefficient of variation is true?
The coefficient of variation is useful in comparing the variability of distributions that have different shapes, means, or standard deviations.
Which one of the following statements is true regarding the financial consequences of loss?
The financial consequences depend on the type of loss exposure, the cause of loss, and the loss frequency and severity.
Which one of the following statements is true with regard to linear regression analysis?
The regression line represents the "best fit" to historical data from prior periods.
Regression analysis assumes that
The variable being forecast varies predictably with some other variable.
Which one of the following statements is true regarding the use of personal inspections to identify loss exposures?
To be effective, personal inspections should be accompanied by discussions with front-line personnel who can identify non-obvious loss exposures.
The COSO Enterprise Risk Management—Integrated Framework includes eight interrelated components that should be integrated within an organization's risk management process. Which one of the following components is a key feature of the COSO standard but not other risk management standards?
control activities
An empirical probability is based on
historical data
Which one of the following is an element of a loss exposure?
a cause of a loss
In 1999, the Basel Committee issued a proposal for a revised Capital Adequacy Framework which consisted of three pillars. One pillar is a review of an institution's internal assessment process and capital adequacy. This pillar is
supervisory
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.
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.
Durham Insurance is developing a predictive model to determine the likelihood that newly licensed drivers will have an accident within the first two years of receiving a license. Durham has data on 500 new drivers. A predictive model based on 400 drivers shows a strong correlation between drivers under age 18 and accidents in the first two years. Before using the model for underwriting purposes, Durham Insurance runs the data on the remaining 100 drivers through the model to confirm that the correlation is significant. The data on the remaining 100 drivers is known as
Holdout data.
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 groups of individuals within an organization is responsible for establishing effective internal controls to monitor risk?
employees
NML Microchip Company adopted the COSO framework and integrated it within the company's risk management process. Two months ago, the company's future revenue stream took an unexpected hit when CBA Microchip Company, a small competitor, introduced its new microchip. CBA's new chip is half the physical size of NML's chip, and can store 10 times the information. Many of NML's customers have canceled orders and purchased the CBA chip. At which part of the COSO framework did NML fail?
event identification
Which one of the following is the term used for the weighted average of all the possible outcomes in a theoretical probability distribution?
expected value
Which one of the following provides a measure of the maximum potential damage associated with an occurrence?
exposure
Basel I and Basel II prescribe capital requirements for
financial institutions
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 documents would best help to identify bottlenecks in an organization's operations that might present critical loss exposures?
flowcharts
Risk reports should be focused on business objectives as well as compliance with regulatory requirements. Reports should identify risks that are increasing or decreasing, risks that need immediate attention, and risks that require further analysis to determine their eventual effect on the organization. These characteristics of risk reporting demonstrate
functionality
Which one of the following is a method of risk transfer?
funded retention
The recognition of expected accidental losses in cash flow analysis
May have a significant effect on the decision to undertake a proposal.
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.
Despite being frequently reminded otherwise, Laura was in the habit of leaving her car door unlocked, often with her purse inside. As a result, Laura's car was stolen, along with her purse. Laura's behavior is an example of a
Morale hazard.
Risks from accidental loss, including the possibility of loss or no loss defines
hazard risk
Which one of the following types of risks can result in losses but not in any gains?
hazard risks
An insurer's fair value is complicated because no ready market exists for trading in insurers. To calculate the fair value of an insurer's reserves, a present value discount is used and a
market value margin is added
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
The total cost incurred by an organization because of the possibility of accidental loss is the organization's
cost of risk
In capital budgeting decisions, the main noncash item affecting income taxes is
depreciation of long term assets
Maria is a risk management professional trying to analyze workers compensation loss frequency by cause of loss. Which one of the following forms of probability distribution would be most appropriate for her to use?
discrete
A sand and gravel business keeps extra vehicles in reserve in case its active vehicles need to come out of service. What risk management technique is being used?
duplication
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
Soy Products Company (SPC) makes a no-fat cheese substitute using soy beans. SPC signed a contract to deliver 100,000 pounds of soy cheese to a chain of health food stores in six months. The health food stores will pay SPC $2.50 per pound of cheese. SPC believes it will need 5,000 bushels of soy beans to produce the cheese. While soy beans currently sell for $10 per bushel, SPC will not purchase the soy beans it needs until three months before delivery of the product. SPC purchased a call option that will allow the company to purchase 5,000 bushels of soy beans at $10 per bushel three months before delivery. Three months before delivery, the price of soybeans had increased to $12 per bushel. Ignoring the cost of the option, how much in production costs did SPC save by hedging the price of the soy beans it needed to fulfill its contract?
$10,000
Bread Basket Company (BBC) is a commercial baker in the Pacific Northwest. One order the company has is to provide a major supermarket with 250,000 loaves of bread four months from today at a price of 75 cents per loaf. BBC believes it will take 5,000 bushels of wheat to make the wheat flour to complete this order. Wheat currently sells for $5.50 per bushel. The other costs of ingredients, processing, and shipping on this order will be $120,000. BBC decided to hedge the price of wheat for the order by purchasing a call option for wheat at $5.50 per bushel. Cost of the option was $600. When BBC began production of the bread, the price of wheat had increased to $6.50 per bushel. How much money did BBC save on this bread order by being hedged?
$4,400
Garnett owns a commercial building and has a lease with a tenant which calls for rental payments to increase annually. To evaluate the lease, she wants to determine the present value of the building's income and then compare that to her costs. The first year's rent is set at $10,000, the second year is $15,000, third year is $20,000, and the 4th year is $25,000. Payments are made on the first day of each year. Assuming a 5% interest rate, the present value of the rental income as of the date of the first payment is
$64,021.
The risk management professional of Lacker Company (LC) is evaluating whether to purchase a sprinkler system for LC's main warehouse. The system costs $55,000 and has an expected useful life of 11 years with no salvage value. System maintenance will cost $1,000 per year, and LC will save $9,000 annually in insurance premiums if the sprinkler system is installed. The LC's income tax rate is 35%. LC uses straight-line deprecation. What is the LC's differential annual after-tax cash flow?
$6950 (IR - IC - D - TIBT + DR) (IR = Incremental Revenue, IC = Incremental Costs, D = Depreciation, TIBT = Tax on Incremental EBT, DR = Depreciation Reversal)
A predictive model is applied to a clothing manufacturer's data of 1,000 employees, 50 of whom had workplace injuries in the past year. The table below shows how often the model correctly and incorrectly predict for each employee "yes, will have an accident" or "no, will not have an accident." Based on the preceding number, these statements can be made: • There are 40 true positives (TP) for which the model correctly predicted yes. • There are 945 true negatives (TN) for which the model correctly predicted no. • There are 5 false positives (FP) for which the model incorrectly predicted yes (and the actual answer is no). • There are 10 false negatives (FN) for which the model incorrectly predicted no (and the actual answer is yes). What is the precision of the workplace injury predictive model?
.80
Millstone Insurance wanted to assign its most complex workers compensation claims to experienced claim adjusters as early as possible. The data science team used the classification tree technique to develop a predictive model. When holdout data was used to test the model's predictive accuracy, 45% of the complex claims were assigned to experienced adjusters. When claims were randomly assigned, only 15% of the complex claims were assigned to experienced adjusters. What is the lift provided by the predictive model?
3 (.45/.15)
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
Alex, the risk manager for Pram Company is considering the purchase of new processing equipment at a cost of $200,000. The equipment would have a useful life of 10 years. The expected differential cash revenues resulting from the purchase would be $50,000 annually. The differential expected value of fire losses resulting from the new equipment is $10,000. Alex has also proposed installing a sprinkler system. The cost of the system is $20,000 and it would have a useful life of 10 years. Annual maintenance on the system would cost $700. This approach would reduce the annual expected fire losses to $2,500. Based on a 10% rate, the present value of $1 received at the end of each year for 10 years is 6.145. Assuming straight-line depreciation, a 40% tax rate, and a minimum acceptable rate of return of 10%, what is the net present value of the purchase of the new equipment and sprinkler system?
6628
Blakely Company insures its fleet of vehicles under an auto policy with a $10,000 deductible for auto physical damage losses. The estimated probability distribution for Blakely's auto physical damage losses is shown below: Based on this information, what is the probability that auto physical damage losses will be within the $10,000 deductible?
82.5%
In a normal distribution 34.13% of all outcomes are within one standard deviation above the mean. The portion between one and two standard deviations above the mean contains 13.59% of all outcomes. What percentage of the total outcomes is between two standard deviations below the mean and two standard deviations above?
95.44%
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.
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.
Two of the most common applications of relative frequency measures in risk management are injuries per person per hour in workers compensation and
Auto accidents per mile driven.
The process of evaluating alternative capital investment proposals in terms of the cash outlays that the proposals require and the present values of the cash inflows that the proposals are likely to generate is referred to as
Capital budgeting.
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.
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.
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 to an entity - apart from any action to alter either the likelihood or impact of the risk - is known as
Inherent risk.
Three main theoretical concepts explain why ERM works. Which one of the following correctly lists those three concepts?
Interdependency, correlation, and portfolio theory
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.
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.
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
Autumn Assurance Group has assets at fair value of $100 million. The present value of Autumn's liabilities is $85 million. The market value margin is $5 million. Using probability models, Autumn determines that its VaR is $8 million because it expects to incur an $8 million or greater loss of capital at a .5 percent probability over a one-year period. 1. What is Autumn's MVS? 2. What is Autumn's economic capital? 3. Does Autumn have excess capital or a deficiency in capital?
MVS = Fair value of assets - (Present value of liabilities + Market value margin) Autumn's MVS = $100 million - ($85 million + $5 million) = $10 million Autumn's economic capital is $8 million. The VaR is $8 million at the threshold determined by Autumn. Autumn's MVS of $10 million is larger than its economic capital of $8 million. Therefore, Autumn has excess capital. of $2 million.
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 statements regarding probability is correct?
Probabilities associated with events such as coin tosses can be developed from theoretical considerations and are unchanging.
Which one of the following statements is true regarding the nature of probability?
Probabilities deduced solely from historical data may change as new data are discovered or the environment changes.
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.
Julie, a risk management professional, has identified automobile accidents by the sales department employees as a major loss exposure for her organization. She is in the process of examining the feasibility of various risk management techniques for this exposure. Which one of the following is a risk financing technique?
Purchase automobile insurance with a low deductible
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
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.
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.
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.
Landon Company needs one new drill press machine. The company is considering using insurance alone to address the risk associated with the project or insurance combined with loss control. Relevant numbers for the two alternatives are provided below: Insurance Only: Cost of project is $300,000. Annual after-tax net cash flow for five years is $78,000. Insurance Plus Loss Control: Cost of project is $335,000. Annual after-tax net cash flow for five years is $87,500. Landon Company uses 8% as the appropriate interest rate in evaluating similar projects. The present value of $1 per year for five years is 3.993. Which one of the following is Landon's best course of action?
Select the insurance plus loss control option.
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.
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.
A main difference between decision trees and event trees is
That event trees analyze the consequences of accidental events rather than decisions.
Which one of the following is the major distinction between the International Standards Organization's ISO 31000 (ISO 31000) and the Committee of Sponsoring Organizations' (COSO) enterprise risk management (ERM)?
The ISO 31000 definition of risk encompasses the potential for positive as well as adverse results, and the COSO definition of risk does not.
Risk management professionals can use risk mapping to identify inherent risk and residual (current) level of risk. Inherent risk is important because the difference between inherent and residual risk provides a measure of
The effectiveness of the current risk treatment
Which one of the following is a responsibility of internal auditors?
To validate that internal controls are in place, functioning, and meeting design objectives
The descriptive approach is applied
When an insurer or risk manager has a specific problem.
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
One way of jointly considering frequency and severity is to combine both frequency and severity distributions into
a total claims distribution
In determining economic capital for insurers, various risks are quantified. One such risk is the potential for adverse loss experience or catastrophic losses. This risk is known as
insurance risk
Mega-Brands is an anchor store at Giganto Mall. If Mega-Brands is shut down due to fire, the local community may sustain which one of the following consequences?
job loss
While performing its annual internal audit of Investment Company, Claire discovered that an employed broker was embezzling funds from clients. When asked how she discovered the embezzlement, Claire said, "We have thousands of clients and 45 brokers who perform thousands of transactions each year. We focus on transactions of $10,000 or more. One transaction showed 100 shares sold for $101.50 per share on a certain day. The stock's trading range that day was between $103 and $104. The broker reported the sale at the lower price, sold the stock at a higher price, and pocketed the difference. Once we found that transaction, we reviewed all of his trades and discovered he was an embezzler." When asked why the original focus was transactions of $10,000 or more, Claire said, "We can't examine every transaction, so we focused on those large enough to be significant. The focus on transactions large enough to a pose a financial threat to Investment Company illustrates
materiality
Value at risk (VaR) is a method of determining the probability of loss on an investment portfolio over a certain time horizon. The VaR method includes which one of the following assumptions?
no trading in the portfolio
Worthington Hotel leased a meeting room to a couple for their wedding reception. As a condition of the lease, the couple was required to sign an agreement promising to "indemnify, defend, and hold harmless" Worthington Hotel for any liability arising out of the leased meeting room. Worthington Hotel's use of the hold harmless agreement illustrates which one of the following methods of dealing with the liability exposure?
noninsurance transfer
In addition to analyzing individual risks, an organization can prepare a report to depict all of the organization's risk scenarios. This analysis provides a description of the risk, lists the risk owners, specifies the risk quadrants impacted by the risk, estimates the likelihood of loss and the resulting consequences, assigns a risk level, and specifies any improvements needed. This collection of reports on the individual risks is called
organizational risk register
Fair value accounting uses the term market value surplus (MVS) for an organization's net worth. Which one of the following is the term used for an insurer's net worth under statutory accounting principles (SAP)?
policyholders surplus
U.S. Petroleum Company would like to purchase oil drilling rights in another nation. That nation, however, is run by a dictator who last year confiscated another foreign company's oil equipment. U.S. Petroleum decided to enter the country through a joint venture with the dictator's brother who heads a small oil company. By entering the foreign nation through a joint venture, U.S. Petroleum was addressing which risk?
political risk
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
Which one of the following is a benefit to the organization from greater risk assurance?
reduced capital costs
f 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
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
Risk management professionals should evaluate the internal and external environments in which the organization operates. Which one of the following is a factor of an organization's internal environment?
risk appetite
Reduced capital costs, more favorable business terms, and greater interdepartmental communication are all benefits of which one of the following?
risk assurance
The level of capital required to provide a cushion against unexpected loss of economic value at a financial institution is known as
risk capital
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 is a technique used to provide a visual perspective of an organization's risks and to prioritize those risks?
risk map
When Cameron was named president and CEO of XYZ Insurance Company, he knew there were morale issues with many employees. The previous president was a task master who had alienated many employees. One of Cameron's first moves was starting the "Third Thursday of the Month Program." On the third Thursday each month, lunch was provided to employees. All of the officers, including Cameron, were available to meet with the employees to answer questions and discuss the company's values. At some of the meetings, employees are given questionnaires to provide feedback to management. The open forum with employees and eliciting feedback through questionnaires are examples of
soft controls
There has been a movement in both the U.S. and internationally to help organizations improve their risk-management practices. Economists believe that risk management must expand to address which one of the following?
systemic risk
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
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
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
The risk management department at Computer Hardware Company uses risk maps to graph and analyze the risks faced by the company. One area of special concern to the risk management team is the difference between residual risk and optimum risk. This difference represents
the risk treatment opportunity to further reduce risk
Aligning risks with the organization's risk appetite defines
tolerable uncertainty
Which one of the following is a characteristic that differentiates big data from traditional data?
velocity