Risk Assessment & Underwriting Flashcards
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Read the first 7 Risk Assessment & Underwriting flashcards as text
A buyer discovers that a sole-source supplier is experiencing financial distress. Which risk response is most appropriate?
Answer: Qualify alternative suppliers as a contingency
Qualifying alternative suppliers reduces concentration risk and ensures supply continuity if the financially distressed supplier fails.
What does the term 'moral hazard' mean in an insurance and risk management context?
Answer: Increased risk-taking behavior after obtaining insurance coverage
Moral hazard occurs when having insurance reduces the incentive to avoid risky behavior, since losses are partially covered.
Which quantitative risk analysis technique uses repeated random sampling to model the probability distribution of outcomes?
Answer: Monte Carlo simulation
Monte Carlo simulation runs thousands of iterations with random variable inputs to produce a probability distribution of possible outcomes.
A supplier's Dun & Bradstreet PAYDEX score of 40 indicates:
Answer: Payments averaging 30 days beyond terms
A PAYDEX score of 40 indicates the supplier typically pays invoices approximately 30 days beyond agreed terms, signaling financial stress.
In procurement risk assessment, 'force majeure' clauses are primarily used to:
Answer: Excuse contract performance due to unforeseeable extraordinary events
Force majeure clauses relieve parties of contractual obligations when extraordinary events beyond their control prevent performance.
Which method assigns a numerical score to risks based on weighted criteria such as likelihood, severity, and detectability?
Answer: Failure Mode and Effects Analysis (FMEA)
FMEA calculates a Risk Priority Number (RPN) by multiplying scores for occurrence, severity, and detectability to prioritize failure modes.
When a company self-insures against procurement risks, the key financial requirement is:
Answer: Maintaining adequate reserves to cover potential losses
Self-insurance requires setting aside sufficient financial reserves to pay claims that would otherwise be covered by an external insurer.