Question 1

Which of the following statements about enterprise risk management (ERM)is (are)true?
I.A goal of ERM is to have risks treated in compartmentalized silos.
II.There may be resistance to the implementation of an ERM program.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Statement I is false because the goal of ERM is to integrate and manage risks across the entire organization, rather than compartmentalize them. Statement II is true because there may be resistance to change within an organization when implementing new programs or processes, such as ERM.

Question 2

Which of the following statements is true concerning the successful adoption of an enterprise risk management program?
I.The management team must be committed to the success of the ERM program.
II.Communication about the ERM program is crucial during the implementation stage.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Both statements are true. The commitment of management is essential for the success of the ERM program as they set the tone at the top and provide the necessary resources. Effective communication during the implementation stage is also crucial to gain buy-in from stakeholders and ensure that the program's goals and objectives are well understood.

Question 3

Enterprise risk management (ERM)programs differ from traditional risk management programs in all of the following ways EXCEPT
A)ERM views risk from a portfolio perspective rather than viewing risks in isolation.
B)ERM encompasses all exposures to risk rather than property,liability,and personnel-related risks only.
C)ERM evaluates risks relative to the internal environment only rather than considering both the internal and external environment.
D)ERM embeds risk management throughout the organization rather than limiting risk management to a few areas of the business.

Accepted Answer

ERM evaluates risks relative to both the internal and external environment, making choice C the exception.

Question 4

Organizations are answerable to various regulatory agencies and to their owners.Required filings with regulatory agencies and communications with the owners are considered in an enterprise risk management (ERM)program.The risk associated with regulatory filings and required communications is called
A)strategic risk.
B)governance/compliance risk.
C)operational risk.
D)systems risk.

Accepted Answer

Governance/compliance risk refers to the potential risk of legal or regulatory sanctions, financial loss, or damage to reputation that an organization may face as a result of failing to comply with laws, regulations, or internal policies and procedures. In the context of ERM, regulatory filings and communication with owners are critical components of governance and compliance, and any failure in these areas could lead to significant risk for the organization. Therefore, B is the best choice for this question.

Question 5

Which statement is (are)true concerning catastrophe models?
I.Businesses other than insurance companies use catastrophe models.
II.Catastrophe models are able to precisely predict disaster occurrences and loss values.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Catastrophe models are used not only by insurance companies, but also by businesses in other industries such as finance and real estate. However, catastrophe models are not able to precisely predict disaster occurrences and loss values, as they are based on historical data and probabilities, and cannot take into account all unforeseen events or human actions.

Question 6

All of the following are benefits that may accrue to businesses that adopt an enterprise risk management (ERM)program EXCEPT
A)improved strategic decision making.
B)increased value of the organization.
C)increased cost of risk.
D)assurance of compliance with regulatory and legal requirements.

Accepted Answer

Increased cost of risk is not a benefit of adopting an enterprise risk management program. ERM programs aim to reduce the overall cost of risk to the business by identifying and managing risks in a coordinated and proactive manner. The other options, improved strategic decision making, increased value of the organization, and assurance of compliance with regulatory and legal requirements, are all potential benefits of ERM programs.

Question 7

West Coast Insurance writes property and liability insurance in California,Oregon,and Washington.These states are all susceptible to earthquakes.To help determine how much reinsurance to purchase,West Coast Insurance hired an organization to use a computer algorithm to estimate what its insured losses would be if a severe earthquake occurred.West Coast Insurance based its purchase of reinsurance on the loss estimates.This scenario illustrates using
A)value-at-risk analysis.
B)catastrophe modeling.
C)risk mapping.
D)a risk management information system.

Accepted Answer

This scenario illustrates the use of catastrophe modeling, which involves using computer algorithms to estimate the potential losses of a catastrophic event. West Coast Insurance is using this information to determine how much reinsurance to purchase.

Question 8

ABC Company in considering a loss control investment.The project will cost $100,000.It will generate an after-tax net cash flow of $60,000 one year after investment and an after-tax net cash flow of $60,000 two years after investment.The present value of $1 received one year from today assuming a 6 percent rate is .9434.The present value of $1 received two years from today assuming a 6 percent interest rate is .8900.Assuming a discount rate of 6 percent,what is the net present value (NPV)of this project?
A)$10,004
B)$13,195
C)$16,604
D)$20,000

Accepted Answer

The correct answer is A. The net present value (NPV) of this project is $10,004. This is calculated by taking the present value of the after-tax net cash flows and subtracting the initial investment. The present value of the after-tax net cash flow one year from today is $60,000 x 0.9434 = $56,604. The present value of the after-tax net cash flow two years from today is $60,000 x 0.8900 = $53,400. The total present value of the after-tax net cash flows is $56,604 + $53,400 = $110,004. The net present value is $110,004 - $100,000 = $10,004.

Question 9

Which of the following is a financial derivative that derives value from specific insurable losses or from an index of values?
A)commodity futures contract
B)corporate bond
C)catastrophe bond
D)insurance option

Accepted Answer

The answer of Which of the following is a financial...

Question 10

When announcing that an enterprise risk management program would be implemented at XYZ Company,the president of the company observed,"We must overcome the silo mentality for the program to be successful." The "silo mentality" refers to
A)over-emphasis on pure risks and ignoring speculative risks.
B)using too much of one risk treatment measure and ignoring other risk treatment methods.
C)focusing narrowly on one area and not viewing risk holistically.
D)everyone assuming someone else is responsible for managing a risk and no one taking leadership.

Accepted Answer

The "silo mentality" refers to focusing narrowly on one area and not viewing risk holistically. This can lead to a lack of communication and coordination between departments, resulting in potentially critical risks being overlooked or underestimated. It is important to break down these silos and encourage a collaborative effort in managing risks.

Question 11

Risk managers may use a number of tools.One tool is the analysis of data to generate information that will help make better informed decisions.Such analysis is called
A)value at risk (VaR)analysis.
B)risk management information systems.
C)predictive analytics.
D)time value of money analysis.

Accepted Answer

The analysis of data to generate information that will help make better informed decisions is called predictive analytics. This tool is commonly used by risk managers to assess potential risks and make informed decisions about managing them. Options A and D are not relevant in this context, while option B refers to a broader category of software tools that support risk management activities.

Question 12

Palmer Polymers is changing from a traditional risk management program to an enterprise risk management program.As a first step,the risk manager determined all the risks that the organization faces.Next,she created a grid with loss frequency on the x-axis and loss severity on the y-axis.Then she plotted all of the loss exposures based on frequency and severity.The grid and the plotted loss exposures are called a
A)probability distribution.
B)catastrophe model.
C)risk map.
D)risk management information system.

Accepted Answer

The risk manager created a grid and plotted all the loss exposures based on frequency and severity, which is called a risk map. Therefore, the correct choice is C - risk map. A probability distribution is a statistical representation of the likelihood of different outcomes in a given situation, a catastrophe model is a mathematical model used to estimate the likelihood and potential impact of a catastrophic event, and a risk management information system is a software system that assists with managing risks in an organization. None of these are described in the scenario provided.

Question 13

Five Below Zero is a new ski resort in Colorado.Five Below Zero is concerned that an abnormally warm winter will prevent the accumulation of snow needed to have a profitable ski season.Five Below Zero purchased a contract that will pay a lump sum if the daily high temperature exceeds 30 degrees for more than 12 days between January 1st and March 31st.The contract Five Below Zero purchased is called a(n)
A)catastrophe bond.
B)weather option.
C)interest rate swap.
D)convertible bond.

Accepted Answer

The contract that Five Below Zero purchased is a form of a weather option, as it provides protection against adverse weather conditions. A catastrophe bond, on the other hand, is a type of insurance-linked security that transfers the risk of a particular catastrophe event to investors. Interest rate swap and convertible bonds are both financial instruments that are unrelated to weather risk management.

Question 14

A risk manager analyzed fleet accident data to help determine which loss control measures would provide the greatest safety incentives for drivers.Examining data to generate information that will help make more informed decisions is called
A)predictive analytics.
B)catastrophe modeling.
C)sensitivity analysis.
D)data mining.

Accepted Answer

The answer of A risk manager analyzed fleet accident data...

Question 15

Last year,XYZ Insurance Company had a combined ratio of 102.4 and lost $10.2 million on the insurance that it sold.The company,however,was required to pay income taxes.The best explanation for this apparent contradiction is that XYZ offset its underwriting loss with
A)increased loss reserves.
B)investment income.
C)increased loss adjustment expenses.
D)unearned premiums.

Accepted Answer

The apparent contradiction can be explained by the fact that XYZ Insurance Company had investment income that offset its underwriting loss.

Question 16

One operational risk that is considered in an enterprise risk management program is risk that develops due to the use of technology by the organization.This risk is called
A)systems risk.
B)process risk.
C)financial risk.
D)strategic risk.

Accepted Answer

Systems risk refers to the potential for losses arising from failures or breaches in an organization's technology systems. It includes the risk of cyber-attacks, software and hardware failures, and data integrity issues. This type of risk is relevant to most organizations, as technology plays a critical role in daily operations.

Quiz 4: Enterprise Risk Management

Which of the following statements about enterprise risk management (ERM) is (are) true? I.A goal of ERM is to have risks treated in compartmentalized silos. II.There may be resistance to the implementation of an ERM program.

Which of the following statements is true concerning the successful adoption of an enterprise risk management program? I.The management team must be committed to the success of the ERM program. II.Communication about the ERM program is crucial during the implementation stage.

Enterprise risk management (ERM) programs differ from traditional risk management programs in all of the following ways EXCEPT

Organizations are answerable to various regulatory agencies and to their owners.Required filings with regulatory agencies and communications with the owners are considered in an enterprise risk management (ERM) program.The risk associated with regulatory filings and required communications is called

Which statement is (are) true concerning catastrophe models? I.Businesses other than insurance companies use catastrophe models. II.Catastrophe models are able to precisely predict disaster occurrences and loss values.

All of the following are benefits that may accrue to businesses that adopt an enterprise risk management (ERM) program EXCEPT

Which of the following is a financial derivative that derives value from specific insurable losses or from an index of values?

When announcing that an enterprise risk management program would be implemented at XYZ Company,the president of the company observed,"We must overcome the silo mentality for the program to be successful." The "silo mentality" refers to

Risk managers may use a number of tools.One tool is the analysis of data to generate information that will help make better informed decisions.Such analysis is called

A risk manager analyzed fleet accident data to help determine which loss control measures would provide the greatest safety incentives for drivers.Examining data to generate information that will help make more informed decisions is called

Last year,XYZ Insurance Company had a combined ratio of 102.4 and lost $10.2 million on the insurance that it sold.The company,however,was required to pay income taxes.The best explanation for this apparent contradiction is that XYZ offset its underwriting loss with

One operational risk that is considered in an enterprise risk management program is risk that develops due to the use of technology by the organization.This risk is called