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1. Risk quadrants are different from risk classifications. Risk quadrants focus on what? The source of the risk itself and what part of the organization has managed it in the past. 2. An enterprise risk management approach is categorizing risks into quad- rants. What are hazard risks? Normally managed by risk management profes- sionals. 3. What are the four risks in the enterprise risk management model? Hazard, operational, financial, and hazard. 4. What risk quadrant is the change of stocks or bonds values because interest rate changes in? Financial risks. 5. What is true of pure and speculative risks? All businesses involve speculative risks. 6. What is true of diversifiable and nondiversifiable risks? Systemic risks are nondiversifiable generally. 7. What is an example of a strategic risk? Anew computer chip that could give a company growth. 8. What is an example of an operational risk? The ability of suppliers to perform. 9. What is true of subjective and objective risks? 1/26 Subjective risk can be present where objective risk is not. 10. What is an example of a speculative risk? Investing in stock. 11. What is true of diversifiable versus nondiversifiable risk? Diversifiable risks are not correlated and can be managed through diversification or spread of risk. 12. A company's fleet of cars is worrying the managers liquidity of the com- pany and fuel prices having an adverse effect is which type of risk quadrant?- Financial risk. 13. An employee embezzling funds from a company for not feeling adequately paid is what risk? Both a hazard and an operational risk. 14. Failing to respond to changing customer demands is an example of what risk? Strategic risk. 15. The fear of your home being hit by a storm and damaged or destroyed is what risk for you? A subjective risk. 16. What quadrant of risk is a harmful chemical found in a building with unknown harm to residents and to the clean up crew part of? A hazard risk. 17. Driving instead of flying because of feeling of safety is an example of what? A subjective risk. 18. Investing money in a rental property brings what? 2/26 20. Renovating a warehouse, purchasing a new order processing software, added two new delivery trucks, and purchasing a production machine which also allows for potential for a new product line, are all projects. Which project is the most speculative? The new production machine. 21. What is a true statement on the basic measures applying to risk manage- ment? Consequences measure the degree to which an occurrence could positively or negatively affect an organization. 22. The law of large numbers states as the number of exposure units in- creases, what happens? The relative accuracy of predictions about future losses increase. 23. Which two measures are important in assessing risk and how to manage it? Consequences and likelihood. 24. What is the measure of the biggest potential loss of an occurrence. An exposure. 25. Giving discounts to everyone in one segment of your book of business or a bank in the same town as a business it gives loans to including its employees, are both examples of high correlation. What is true about correlation? When two variables are perfectly positively correlated, one variable increases, and the other will increase in direct proportion. 26. Covariance is different from correlation in that correlation represents how strongly variables are related. Covariance is the measure of correlation. There- fore, covariance is what? The measure of the extent to which variables move together or independently. 27. Youown common stock of five large clothing brands. What would improve the 4126 portfolios risk the greatest? Adding a discount retailer stock, not a smaller clothing brand. 28. What is true of correlation analysis? Abnormal observations and inaccurate data may skew the analysis. 29. Stock A and B are correlated by 0.80 while stock A and C are correlated by 0.10. Which portfolio would produce the lowest risk? Portfolio with stock A and C. 30. A strong correlation exists between umbrella policy and replacement cost policy purchases. It would be incorrect to conclude demand increases for umbrella policies create demand increases for replacement policies, why? - Because correlation does not measure causality. 31. What is true of regression analysis? The regression line represents the best fit to historical data from prior periods. 32. What is trend analysis? An analysis that identifies mathematical patterns in past losses and projects the patterns into the future. They are based on quantifi- able information. 42. What key risk indicator might a contractor monitor? Budget variances. 43. What key risk indicator might a manufacturer monitor? Cost of raw materi- als. 44. What are key risk indicators? They are based on quantifiable information and support management decisions. 45. Key risk indicators are used to plan for and respond to risk which can do what? A key risk indicator can reveal an upward trend in the level of a risk that, if it continues, will exceed the designated risk threshold for that risk. 46. Key risk indicators enhance what? Efficiency. 47. Key risk indicators help organizations identify issues that can lead to losses and key risk indicators are based on what? Strategic objectives. 48. The CEO is interested in the key risk indicators measuring a company's profitability. What area of measurement will the risk manager want to look at? Aged accounts receivable. 49. What term measures the significance of a risk? Risk criteria. 50. What departments usually have the most detailed key risk indicators? De- partment levels. 51. What do business process managements do? Focus on coordinating activ- ities toward the preferences and needs of customers and aligning operational with strategic goals. 52. What business process management step is often skipped? Identify processes. 53. Describe the first step of the business process management. Critical processes that support achievement of the organization's goals are selected for analysis. 54. Business process management focuses on what? Customer satisfaction. 55. Define risk indicator in business process management. A tool used to measure the level of uncertainty in an activity, project, or process. 56. What is true regarding the business process management life cycle? The model is driven by the collaboration of human and technological input. 57. What risk control spreads loss exposures over different markets, regions, projects, etc.? Diversification. 58. Keeping products in different locations is what risk control? Separation. 59. What risk control technique reduces frequency of losses and can reduce severity? Loss prevention. 60. What risk control technique is used for business risk more so than hazard risks? Diversification. 61. Discontinuing a product is what practice? 8/26 71. What is true of root cause analysis? It must produce effective recommenda- tions for prevention of future accidents. 72. What root cause analysis procedure came from quality control procedures in industrial manufacturing? Production-based root cause analysis. 73. A worker is killed because another worker removes a safety device from the machine and another removes a warning sticker. What is the root cause of this? Inadequate training. 74. An analysis that begins with causes and then gets to consequences is what? Failure mode and effects analysis. 75. How do you prioritize using failure mode and effects analysis? If two system failures are compared, the one with a higher criticality score should be addressed first even if its risk priority number is lower than the other system failure. 76. In failure mode and effects analysis, ranking the severity of losing each component is what? Criticality analysis. 77. A failure mode with an effect on the same level that is being analyzed produces what? A local effect. 78. How do you calculate criticality score? Multiply the severity of failure by the likelihood of failure. Severity * likelihood. 79. What analysis is identifying important components of production process and ranking the severity of losing each into four failure categories in an attempt to establish priorities of hazards and control? 10/26 Criticality analysis. 80. Using failure mode and effects analysis to analyze a system, subsystem, components, sub-assemblies, and parts, all with different levels, these various systems and subsystems are what? Indenture levels. 81. Fault tree analysis naturally suggests what? Loss prevention measures. 82. What is the purpose of a fault tree analysis? To identify different ways of analyzing the sequence of events causing the system failures so that the failure can be prevented. 83. In fault tree analysis, an "or" gate means what? That any of the events leading to the gate is sufficient to cause that event to occur. 84. "And" connecting events in rectangles C, D, and E to the event in rectangle A indicates what? Preventing the event in rectangle C, D, or E from occurring will prevent the event in rectangle A from occurring. 85. "And" gate event probabilities include what? Multiplying the probability of each event occurring to get the probably of passing through the "and" gate. 86. Tracing events leading to a failure backwards in a particular system is what approach? Fault tree analysis. 87. What is ratemaking? The process insurers use to calculate insurance rates, which are a premium component. 11/26 Develop a rate structure that enables the insurer to compete effectively while earning a reasonable profit. 98. What is true of the five ideal characteristics of rates? Some often conflict with one another and compromises are necessary. 99. What is the rate multiplied by the number of exposure units? Premium. 100. What is the component in ratemaking to pay future claims and loss adjustment expenses? Prospective loss costs. 101. What component in ratemaking is for premium taxes and fees paid to regulatory organizations? Expense provision. 102. The pure premium is the amount included in the rate per exposure unit required to pay losses. This component is also called what? Loss cost. 103. With regards to investment operations, what is true? Loss reserves for liability insurance are much greater than for property insurance. 104. What is pure premium? The amount included in the rate per exposure unit required to pay losses. 105. What are expenses associated with adjust claims? Loss adjustment ex- penses. 106. A property-casualty insurer has what two operations? Insurance opera- tions and investment operations. 13/26 107. True or false, prospective loss costs are supplied by advisory organiza- tions or developed by insurers with large enough pools of loss data. True. 108. What describes components of an insurance rate? Amounts to pay future claims, loss adjustment expenses, other expenses, and an amount for profit and contingencies. 109. An earned exposure unit is what? An exposure unit that has provided a full year of coverage, by the insurer. 110. The amount in rates to protect against claims or expenses being high is what? The loading for profits and contingencies. 111. What is true of rate calculations? Some states require investment income to be considered explicitly in rate calculations. 112. Future acquisition costs, overhead, and premium taxes is what? The expense provision of a rate. 113. The amount to pay future claims and loss adjustment expenses is what?- Prospective loss costs. 114. Investment return depends on loss reserves, the associated unearned premium reserves, and what? The types of insurance written. 115. In house adjusters salaries are part of what? Loss adjustment expenses 116. The value being insured in a $100,000 homeowners policy is what? The exposure base. 14/26 126. Pure premium method = Actual losses + loss adjusted expenses / number of exposure units 127. What involves an apples-to-apples exact matching of losses, premiums, and exposure units to a specific policy? Policy-year data collection. 128. True or false, when using prospective loss costs supplied by advisory organizations, each insurer must file its own loss cost multiplier to determine its insurance rate. True. 129. True or false, class relativities are used to develop rates for each rating class. True. 130. Territorial relativities can be determined by comparing the estimated loss ratio for each geographic territory to the statewide what? Average loss ratio. 131. The future development of losses can be estimated by several actuarial methods. The most common method used applies loss development factors to the what? Current experience. 132. What is correct with respect to the policy-year ratemaking data collection method? It is the only method that links losses, premiums, and exposure units to a specific policy. 133. Workers compensation insurance benefits are established by a statute. If legislation or a court decision changes these benefits, past losses must be adjust to what? Current benefit levels. 134. What ratemaking data collection method is the least accurate? 16/26 Calen- dar-year. 135. When using prospective loss costs supplied by advisory organizations to produce rates, each insurer must apply its own what? Loss cost multiplier. 136. When creating or revising insurance rates, an insurer's staff or an advi- sory organization on behalf of the insurer follows a series of steps. Generally the first step in this process is to what? Collect data. 137. During which one of the following steps in the ratemaking data develop- ment process does an insurer review which areas in a state deserve higher or lower rates? Determine territorial and c lass relativities. 138. True or false, exponential trending assumes data will increase by a fixed percentage. True 139. As a key step in the process of developing insurance rates, actuaries adjust the premium and loss data that they have collected from past years. Which one of the following statements concerning this adjustment process is true? Loss development factors reflect growth in incurred reported losses and in IBNR. 140. When an insurer is under-reserved, its surplus is what? Overstated. 17126 151. What is a negative of the average method of case reserves? It may produce reserves that are too low for insurance with wide variation in claims. 152. The average method of case reserving is best for what insurance? Insur- ance with claims that are reported and paid promptly. 153. The tabular method of determining case loss reserves would be best for what? A structured settlement amount for a liability insurance claim. 154. What case reserving method establishes average amount for all claims with similar characteristics such as age, health, and marital status? Tabular method. 155. What reserving method should be used for a large book of first party automobile policies? Average method. 156. What method uses historical relationships between incurred but not reported reserves and reported losses in incurred but not reported forecasts?- Percentage method. 157. What do INBR reserves represent the different between? Ultimate losses and reported incurred losses. 19/26 158. The difference between incurred losses and ultimate losses is? INBR reserves 159. Who sets the level of bulk reserves for an insurer? Actuary. 160. What is true of the loss ratio method in establishing bulk reserves for INBR losses? The loss ratio method should only be used for the first year or two after losses are incurred. 161. Which one of the following statements regarding the calculation of the reserve for unallocated loss adjustment expenses is accurate? Itis usually es- timated as a percentage of the sum of incurred losses and allocated loss adjustment expenses. 162. Hazard analysis is what? A method that identifies conditions that increase the frequency or severity of loss. 163. What is the least effective method of identifying all personal property loss exposures? Loss histories. 164. What document helps identify bottlenecks? Flowcharts. 165. To estimate adverse financial affects from business interruption due to accidental loss, what should you use? Balance sheet. 166. What is true of checklists and questionnaires? The questions include in the questionnaires and checklists developed by insurers relate 20/26 
