Corporate Risk Management Exam 1

Traditional Risk Management

- Risks are evaluated in a "silo" approach - Losses are usually insurable, pure risks - hazard risk quadrant only

Components of Cost of Risk

1) Cost of Losses (not insured) a. Direct - inflicted by the peril itself b. Indirect - suffered as a consequence of the direct loss 2) Cost of Loss Control - people, processes, equipment 3) Cost of Loss Financing (insurance premiums or expenses incurred for non-insurance indemnity) 4) Cost of Risk Management Administration Small company - Risk Manager Larger company - RM Staff also could be broker or agent

5 theories to accident causation

1.Sequence of Events (Heinrich's Domino Theory) 2.Energy Transfer Theory 3.Technique of Operations Review (TOR) 4.Change Analysis 5. Job Safety Analysis

Speculative Risk

A chance of loss, no loss, or gain.

Risk Control

A conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable.

Delphi Technique

A decision-making technique in which group members do not meet face-to-face but respond in writing to questions posed by the group leader.

Northern Consolidated is evaluating the financial risk associated with its investment portfolio. The risk manager knows that as interest rates increase, bond values decrease. This relationship is known as

A negative covariance

Which one of the following statements about root cause analysis (RCA) is true?

A root cause must produce effective recommendations for prevention of future accidents.

Corporate directors are considered to have met their duty of care if they

Act in good faith and in a manner they reasonable believe to be int he best interests of the corporation.

Heinrich's Domino Theory

All accidents are the result of human error, and are part of a linear causation sequence that may lead to injury. •The removal of any of the four factors prior to the injury would prevent the injury from occurring Applies primarily to accidents involving human control/human carelessness 1. Social Environment/Inherited Behavior 2. Fault of Person 3. Unsafe Act or Behavior 4. Accident 5. Injury

Risk Appetite

Amount of uncertainty an organization is willing to pursue or to accept to attain its risk management goals.

Energy transfer theory

An approach to accident causation that views accidents as energy that is released and that affects objects, including living things, in amounts or at rates that the objects cannot tolerate.

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

Ideally insurable loss exposures are subject to losses that

Are definite in time, cause, and location

Strategic Risk

Arise from trends in the economy and society, including changes in the economic, political, and competitive environments, as well as from demographic shifts

Mutual Fund Company (MFC) offers a wide array of mutual fund options to investors. Each mutual fund has a different fund objective and set of investment guidelines that apply to the fund. While MFC gives considerable freedom to its fund portfolio managers, they are required to abide by the fund's investment guidelines. To monitor compliance MFC developed a computer algorithm. The computer algorithm continuously monitors each fund's compliance with investment guidelines. If a fund manager violates the investment guidelines, the computer immediately notifies MFC's internal control director, and corrective action is taken. MFC's use of the computer algorithm to monitor investment compliance and to provide notification when corrective action is necessary illustrates use of

Artificial intelligence

What is an example of a positive risk for a start- up business

Attracting investor interest

Fiduciary liability loss exposures from benefit plans arise mainly out of the possibility that

Beneficiaries of an employee benefit plan may make a claim against the plan officials for breach of their fiduciary duties.

An advantage of a large deductible plan is that it allows the insured organization to

Benefit from the cash flow available on the retained loss reserves.

A risk manager for an organization has proposed a meeting to ask a series of "What If?" questions to project the consequences for implementing alternative processes under consideration. Which one of the following system safety analysis techniques is the risk manager proposing?

Change analysis

Which of the following risk management program goals is an essential goal for all public entities?

Continuity of operations

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

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.

Alice is an assembly-line worker in an auto parts manufacturing plant. One day she notices some irregularities in the operation of the punch press. Concerned about meeting production goals, she continues to operate the punch press without reporting the malfunction. Later that day, the punch press shatters, injuring Alice and several of her coworkers. This example best illustrates the accident causation theory of the

Domino Theory

Modifying the contact surface or basic structure that can be affected by installing breakaway highway light poles or requiring front and side airbags in automobiles to cushion occupants' impact is a basic strategy of the

Energy Transfer theory

Volatility

Frequent Fluctuations, such as in the price of an asset •As risk increases, volatility increases

Risks from accidental loss, including the possibility of loss or no loss defines

Hazard Risk

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 study

Risk Criteria

Information used as a basis for measuring the significance of a risk.

Which one of the following data capture tools has led to an explosion of risk management innovation by allowing smart products to transmit data to each other and to central hubs?

Internet of Things

Each of the risk control techniques of duplication, separation, and diversification

Reduce the severity of the loss associated with the organization's loss exposures

Which one of the following is a benefit to a particular organization of risk management?

Reduced the cost of risk

An employer who fires a worker because he or she exposed unethical or illegal practices leaves itself vulnerable to which one of the following types of employment practice claims?

Retaliation

Don is the Risk Manager for Rafferty Coporation. One of his peers, Sally, asks him one day, "How to you define risk?" When Don replies, which one of the following statements is accurate?

Risk has different meanings within the risk management and insurance communities.

The difference between risk tech and insurtech is

Risk tech goes beyond insurtech by expanding its focus to making risk financing more efficient and preventing and mitigating losses in a variety of industries.

Smart products

Sense the environment, process data

Which one of the following is a major benefit that smart insurance contracts can provide to insurance customers?

Smart contracts can dramatically increase the speed of loss payments.

Last year, three Metro City firemen died responding to a fire at a chemical plant, when they were overcome by toxic fumes. In response, Metro City is purchasing advanced first responder gear. It includes special flame retardant suits with chemical and explosive fume sensors, air quality sensors, and heat sensors. Responders will also wear special watches that will track a responder's pulse, respiration, and blood pressure; and helpmets that include video cameras. All of these sensors will feed data to a computer in real-time. The computer will analyze the data and issue threat levels and evacuation orders, if necessary. The protective gear Metro City will purchase and the data transmission and analysis capability illustrate the use of

Smart products

Diversification is a risk control technique that

Spreads loss exposures over numerous projects, products, markets, or regions.

Which one of the following is a pre-loss action for the flood cause of loss?

Stock disaster supplies

Which one of the following risk identification techniques helps identify the interconnectedness of risk across organizational functions?

Team approach

Which one of the following is a tool that can be used by fraud investigators to compare documents and analyze notes?

Text mining

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

Subjective Risk

The perceived amount of risk based on an individual's or organization's opinion.

systemic risk

The potential for a major disruption in the function of an entire market or financial system.

The focus of risk quadrants is different from the focus of risk classifications in general. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on

The source of risk and who traditionally managed it

Variance

The spread of the data set - how far apart the numbers are relative to the average

Cost of risk

The total cost incurred by an organization because of the possibility of accidental loss

Aligning risks with the organization's risk appetite defines

Tolerable uncertainty

Likelihood

a quantitative estimate of the certainty with which the outcome of a specific event can be predicted

Pure Risk

a risk that presents the chance of loss but no opportunity for gain

Hazard risk

arise from property, liability, or personnel loss exposures and are generally the subject of insurance

Operational Risk

arises from people, processes, systems, or controls

financial risk

arises from the effect of market forces on financial assets or liabilities

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

One of the four characteristics that affects an individual's susceptibility to injury or death from a building fire is

awareness of the fire

Objective risk

based on facts

diversifiable risk

can be eliminated through diversification (like stocks)

Non-Diversifiable Risk

cannot be eliminated or reduced through diversification, effects market and economy as a whole, high correlation

Creative Catering has a 15 year-old vehicle that was originally built to prepare and serve sandwiches and drinks at various outdoor functions such as car shows, sporting events, etc. The vehicle is of low value but it generates approximately $100,000 a year in sales. The risk management professional will primarily be concerned about its

economic value

According to the technique of operations review approach, one category of fault of an organization's management is

failure to take responsibility

Fluctuations in the value of stocks or bonds due to interest rate changes is an example of

financial risk

Risk Management Framework

foundation for applying the risk management process throughout the organization

This earthquake-resistant construction relies on the resilience of steel or specially designed reinforced concrete to absorb energy, undergo considerable distortion, and return to its original shape. Which one of the following describes this type of design?

frame action design

Risk quadrants

hazard risk, operational risk, financial risk, strategic risk

The original cost of a property is known as the

historical cost

One example of a noninsurance risk financing transfer is a

hold-harmless agreement

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 contractor agrees to indemnify and hold harmless the owner against claims, damages, bodily injury, or property damage arising out of the contractor's work and caused by any act of omission of the contractor, his agents, and his employees." This is an example of which one of the following forms of a hold-harmless agreement?"The contractor agrees to indemnify and hold harmless the owner against claims, damages, bodily injury, or property damage arising out of the contractor's work and caused by any act of omission of the contractor, his agents, and his employees." This is an example of which one of the following forms of a hold-harmless agreement?

limited form

Which one of the following valuation standards is most appropriate for valuing products that are relatively indistinguishable from one another, such as agricultural products, oil, or precious metals?

market value

The traditional definition of risk management reflects the traditional concept of risk as _______________

negative

Which one of the following risk control techniques is being used by a manufacturer that installs a wet-pipe sprinkler system in its warehouse?

reduction

Holistic risk management includes the offset of losses with gains

risks should be evaluated as a whole (portfolio theory)

An organization implements a new procedure that requires employees who travel to take differnet flights rather than traveling together. This is an example of which one of the following risk control techniques for this personnel risk?

separation

Which one of the following risk control techniques might actually increase loss frequency?

separation

Hazard and operability study (HAZOP)

structured and systematic examination of a planned or existing process or operation in order to identify and evaluate problems that may represent risks to personnel or equipment, or prevent efficient operation; it is carried out by a suitably experienced multi-disciplinary team during a set of meetings. •comprehensive review of a system or process •Used to design complex, scientific systems

Law of Large Numbers

the larger the number of individuals that are randomly drawn from a population, the more representative the resulting group will be of the entire population. allows us to more accurately predict the likelihood of events. As the number of similar, but independent, exposure rates increase, the relative accuracy of predictions about future outcomes (losses) also 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.

Risk managers today differ from traditional risk managers in which one of the following ways

they attempt to minimize threats and optimize opportunities

Clear-Rite Company specializes in the clean-up of hazardous chemical spills. Workers performing clean-up operations must use safety suits to prevent exposure to chemicals. The suits include pulse and respiration monitors, body temperature sensors, and chemical sensors. The monitors and sensors report data to a mobile operations center which is deployed to each clean-up site. The pulse and respiration monitors and the sensors that are part of the protective gear are called

wearable technologies

The Internet of Things

•Allows smart products to communicate with each other

exposure

•Any condition that presents a possibility of gain or loss, whether or not an actual loss occurs. •Exposure provides a measure of the maximum potential damage associated with an occurrence.

Major options for risk treatment

•Avoid the risk •Modify the likelihood and/or impact of the risk •Transfer the risk •Retain the risk Exploit the risk

Combined Approach

•Computerized Surveys can streamline bottom-up approach •Key productions centers can be targeted •Results can be analyzed with information from top-down perspective Provides a more realistic identification of risks

Advantages of Delphi Technique

•Cost effective •Eliminates group bias - anonymous

Disadvantages of delphi technique

•Current expert opinion may not matter depending on the topic Novel new product - product users' opinions may be more helpful

Blockchain

•Digital ledger that records and verifies transactions •Can maintain transactions involving cash, inventory, accounts receivable, fixed assets, claims •Each transaction is recorded, so it tracks changes over time •Bitcoin and other cryptocurrencies use blockchain to record and confirm its value

bottom-up approach

•Employees with a realistic view of operations and the environment compile and analyze risk indicators

Enterprise Risk Management

•Holistic - assesses all areas of the business •Includes the other 3 quadrants, too •Strategic •Operational •Financial •Positive or Negative Forward-looking

Covariance

•How two random risk variables will change in relation to each other •Calculates correlation (linear relationship) between the variables •A positive covariance means the variables move up or down at the same time (they are correlated) •A negative covariance means that move counter to one another (one increases when the other decreases)

Scenario Analysis

•Identifies risks and potential consequences •Must also consider business interruption, customer relations, reputational risk •Helps to prioritize risks

Why does RMI measure variance and covariance

•Identify and quantify relationships among risks •Communicate the degree of uncertainty in a risk portfolio •Prioritize investments in loss control •Optimize financing for multiple sources of risk •Evaluate the effectiveness of the RM program

Theoretical Pillars of ERM

•Interdependency - everything interconnects - Silos don't work •(a financial risk could be related to a hazard risk) •Correlation - increases risk. It is best to diversify when possible •Would a property insurer cover only homes on the gulf coast? •Portfolio Theory - risk includes both individual risks and their interactions

Facilitated Workshops

•RM professional (should be a neutral party) meets with organization's leaders, key employees, and key stakeholders - group discussion identifies risks •Involves brainstorming and free flow of ideas •A facilitator is required to encourage brainstorming and follow-up discussion •Information on level of risk and priority •Effects of risk on various people/groups •Identifies positive and negative risk

top-down approach

•Senior management decides which risks pose a significant threat or opportunity •Provides a high-level view of the organization and the risks central to meeting objectives

Examples of energy transfer theory

•Separating high speed objects from other objects •Cars on highway from pedestrians •Allowing high speed objects to slow down •Hydraulics on an elevator •Prevent the spread of fire Firewalls between buildings

Cloud Computing

•Vast amounts of data can be stored and shared

Value at Risk (VaR)

•a technique to quantify financial risk by measuring the likelihood of losing more than a specific dollar amount over a specific period of time •A useful measurement to determine risks that fall outside of an organization's risk appetite.

Risktech

•use of emerging technology to prevent, mitigate, or exploit risk

Preventative analytics

•uses big data and risktech to prevent a loss Example: Automatic braking - truck sees car stopped ahead, applies brakes