Probability - correct answerlikelihood that a particular outcome or event will occur
Describe the two elements of risk - correct answer1. uncertainty
... [Show More] of outcomes - risk involves uncertainty about the type of outcome, the timing of the outcome, or both.
2. possibility of a negative outcome - at least one of the potential outcomes is negative, which means a loss or reduction in value.
Describe the difference between possibility and probability - correct answerPossibility means that an outcome or event may or may not occur. It does not quantify risk; it only verifies that risk is present. Probability, the likelihood that an outcome or event will occur, quantifies risk. It is measurable and has a value between zero and one.
Explain how understanding various outcome possibilities can aid an organization in its risk management efforts. - correct answerWith an understanding of this, an organization can focus its risk management efforts on risks that can be appropriately managed. The organization can also use probabilities to decide which activities (and associated risks) to undertake and which risk management techniques to use.
Pure Risk - correct answerA chance of loss or no loss, but no chance of gain.
Speculative risk - correct answerA chance of loss, no loss, or gain.
Credit risk - correct answerThe risk that customers or other creditors will fail to make promised payments as they come due
subjective risk - correct answerThe perceived amount of risk based on an individual's or organization's opinion.
objective risk - correct answerThe measurable variation in uncertain outcomes based on facts and data.
Diversifiable risk - correct answerA risk that affects only some individuals, businesses, or small groups.
nondiversifiable risk - correct answerA risk that affects a large segment of society at the same time.
systemic risk - correct answerThe potential for a major disruption in the function of an entire market or financial system.
market risk - correct answerUncertainty about an investment's future value because of potential changes in the market for that type of investment
liquidity risk - correct answerThe risk that an asset cannot be sold on short notice without incurring a loss
Describe how classifying risk helps an organization's risk management process - correct answerbecause many risks in the same classification have similar attributes. It can also help with managing risk, because many risks in the same classification can be managed with similar techniques. Finally, classification helps with the administration function of risk management by helping to ensure that risks in the same classification are less likely to be overlooked.
Compare pure risk with speculative risk - correct answerA pure risk is a chance of loss or no loss, but no chance of gain. In comparison, speculative risk involves a chance of gain
Explain why it is important to distinguish between speculative risks and pure risks when making risk management decisions - correct answerIt is important for an organization to distinguish between speculative risks and pure risks when making risk management decisions because the two types of risk must often be managed differently. Further, most insurance policies are not designed to handle speculative risks
Explain the reasons why subjective and objective risk may differ - correct answer1. Familiarity and control - ex. air travel vs driving car
2. Consequences over likelihood - "it can't happen to me" or overstating chance when it has happened to you.
3. Risk awareness - if not aware of risks, it is perceived as low risk
Contrast diversifiable and nondiversifiable - correct answerDiversifiable risk is not highly correlated and can be managed through diversification, or spread of risk. Nondiversifiable risks are correlated - that is, their gaines or losses tend to occur simultaneously rather than randomly.
Describe the quadrants of risk - correct answer1. Hazard risks: arise from property, liability, or personnel loss exposures and are generally the subject of insurance
2. Operational risks: fall outside the hazard risk category and arise from people or a failure in processes, systems, or controls.
3. Financial risks: arise from the effect of market forces on financial assets or liabilities and include market risk, credit risk, liquidity risk, and price risk.
4. Strategic risks arise from trends in the economy and society, including changes in the economic, political, and competitive environments, as well as from demographic shifts.
Classify risks as pure or speculative, subjective or objective, and diversifiable or nondiversifiable.
Damage to an office building resulting from a hurricane - correct answerPure risk bc there is no chance of gain. Subjective bc the building owner may have their own idea about the frequency/severity of loss. Objective bc there are measures of frequency and severity based on data. Nondiversifiable bc hurricanes affect many properties simultaneously.
Classify risks as pure or speculative, subjective or objective, and diversifiable or nondiversifiable.
Reduction in value of retirement savings - correct answerSpeculative bc there is a chance of gain. Subjective bc the investor may have their own expectations of retirement investments. Objective bc of historical data on investment returns. Diversifiable bc the investor has many investment options to offset the risk of a reduction in retirement savings
Classify risks as pure or speculative, subjective or objective, and diversifiable or nondiversifiable.
Products liability claim against a manufacturer - correct answerpure risk, subjective and objective, diversifiable
Enterprise Risk Management - correct answerAn approach to managing all of an organization's key business risks and opportunities with the intent of maximizing shareholder value.
Describe a common concept among the various definitions of enterprise risk management (ERM) - correct answerThey all include the concept of managing an organization's risks to help that organization meet its objectives. This link between the management of an organization's risks and its objectives is a key driver in deciding how to assess and treat risks
Identify the three main theoretical pillars of ERM - correct answer1. Interdependency
2. Correlation
3. Portfolio theory
Compare the traditional risk management function with the ERM risk management function - correct answerUnder traditional, there is a risk manager and a risk management department to manage hazard risk. It mainly provides risk transfer, such as insurance, for the organization. ERM, the responsibility of the risk management function is broader and includes all of an organization's risks, not just hazard risks. The entire organization at all levels becomes responsible for risk management as the ERM framework encompasses all stakeholders.
Describe the role of the Chief risk officer (CRO) in ERM - correct answerThey assume the role of facilitator, engages the organization's management in a continuous conversation that establishes risk strategic goals in relation to the organization's strengths weaknesses, opportunities, and threats (SWOT). Their responsibility includes helping the enterprise to create a risk culture in which managers of the organization's divisions and units, and eventually individual employees become risk owners.
Describe communications in an organization with a fully integrated ERM program - correct answerIt develops a communication matrix that moves information throughout the organization. Communications include dialogue and discussions among the different units and levels within the organization. The establishment of valid metrics and the continuous flow of data is critical aspect. The metrics are carefully woven into reporting structures that engage the entire organization, including both internal and external stakeholders.
Provide two typical impediments to successfully implementing an ERM program - correct answer1. Technological deficiency
2. The traditional organizational culture of entrenches silos.
An organization manufactures and sells pain relief meds. There is a products liability risk associated with this business. Describe a traditional risk management approach to this vs an ERM approach - correct answerA traditional approach would be to transfer some of the risk and purchase liability insurance. An ERM approach would be in additional to risk control and risk transfer, address the repetitional risk related to products liability and the potential loss of business income if a product is removed from the market
Smart product - correct answerAn innovative item that uses sensors; wireless sensor networks; and data collection, transmission, and analysis to further enable the item to be faster, more useful, or otherwise improved.
Internet of Things (IoT) - correct answerA network of objects that transmit data to computers
Cloud Computing - correct answerinformation, technology, and storage services contractually provided from remote locations, through the internet or another network, without a direct server connection
Telematics - correct answerThe use of technological devices in vehicles with wireless communication and GPS tracking that transmit data to businesses or government agencies; some return information for the driver.
text mining - correct answerObtaining information through language recognition
Identify the focus of traditional risk assessment techniques - correct answerTraditional risk management techniques focus on root cause analysis
Identify the three components that are fueling the big data revolution - correct answerdata capture, data storage, and data analytics
Summarize how smart products enable data capture - correct answerby sensing their environment, processing data, and communicating with other smart products and smart operations through the Internet of Things
Identify the blockchain characteristics that make it suitable for risk management applications - correct answerThe risk management applications of the blockchain are a by-product of the medium's immutability; security; transparency; scalability; and ability to facilitate the sharing of verified, quality data
Identify examples of how insurers and risk managers can use data-driven decision making to improve business results - correct answer1. Automating decision making for improved accuracy and efficiency
2. Organizing large volumes of new data
3. Discovering new relationships in data
4. Exploring new sources of data
5. Developing new products
Cost of risk - correct answerThe total cost incurred by an organization because of the possibility of accidental loss.
Explain how expected losses and residual uncertainty are affected when an organization has an effective risk management program. - correct answerAn organization with an effective risk management program should experience smaller expected losses (less frequent or less severe) and experience less residual uncertainty than a comparable organization that does not practice good risk management.
ex. an organization with a security system would expect to have fewer thefts (therefore lower expected losses) and a better sense of security (less residual uncertainty)
Identify the costs used to compute the overall financial consequence of risk for a given asset or activity - correct answer1. Costs of losses not reimbursed by insurance or other external sources.
2. Cost of insurance premiums
3. Cost of external sources of funds, such as interest payments to lenders or transaction costs associated with non insurance indemnity
4. Cost of measures to prevent or reduce the size of potential losses
5. Cost of implementing and administering risk management
Identify ways that risk management benefits individuals - correct answerthrough preserving financial resources by reducing an individual's expected losses, and through reducing anxiety
Identify ways that risk management benefits organizations - correct answerby preserving financial resources, providing a sense of confidence that capital is protected against future costs, and reducing the deterrence effect of risk
Identify ways that risk management benefits society - correct answerby lowering expected losses and improving allocation of productive resources
Value at Risk (VaR) - correct answerA threshold value such that the probability of loss on the portfolio over the given time horizon exceeds this value, assuming normal markets and no trading in the portfolio
Summarize how an organization should align its risk management objectives - correct answerEach organization should align its risk management objectives with its overall objectives. These objectives should reflect the organization's risk appetite and the organization's internal and external context
Explain the risk management goal of tolerable uncertainty - correct answeraligning risks with the organization's risk appetite. Managers want to be assured that whatever might happen with be within the bounds of what was anticipated and will be effectively addressed by the risk management program. Risk management programs should use measurements that align with the organization's overall objectives and take into account the risk appetite of senior management
Describe the risk management goal of satisfying the organization's legal requirements - correct answer1. Standard of care that is owed to others
2. Contracts entered into by the organization
3. Federal, state, provincial, territorial, and local laws and regulations
Summarize the role of risk management in the survival of an organization - correct answerSurvival of an organization depends on identifying as many risks as possible that could threaten the organization's ability to survive and managing those risks appropriately. It also depends on anticipating and recognizing emerging risks
Identify the steps an organization should take to provide business continuity - correct answer1. Identify activities whose interruptions cannot be tolerated
2. Identify the types of accidents that could interrupt such activities
3. Determine the standby resources that must be immediately available to counter the effects of those accidents
4. Ensure the availability of the standby resources at even the most unlikely and difficult times
Explain how risk management helps an organization meet the minimum profit expectation for an activity - correct answerrisk management professionals must identify the risks that could prevent this goal from being reached, as well as the risks that could help achieve this goal within the context of the organization's overall objectives
Give an ex of how each of the following risk management program goals might conflict with the goal of economy of risk management operations:
Tolerable uncertainty - correct answerTolerable uncertainty might conflict with the goal of economy of operations bc of the cost of risk management efforts
Give an ex of how each of the following risk management program goals might conflict with the goal of economy of risk management operations:
Legality - correct answerLegality might conflict with the goal of economy of operations bc implementing safety standards could be an added expense
Give an ex of how each of the following risk management program goals might conflict with the goal of economy of risk management operations:
Social responsibility - correct answerSocial responsibility might conflict with the goal of economy of operations bc obligations such as charitable contributions could raise costs
Risk control - correct answerA conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable.
Risk Financing - correct answerA conscious act or decision not to act that generates the funds to pay for losses and risk control measures or to offset variability in cash flows.
Identify the advantage of using different methods to identify loss exposures - correct [Show Less]