Risk Assessment & Underwriting Flashcards
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Read the first 7 Risk Assessment & Underwriting flashcards as text
Which contract clause protects a buyer from cost overruns by requiring the supplier to absorb any expense above a fixed ceiling?
Answer: Firm-fixed-price ceiling clause
A firm-fixed-price ceiling sets a maximum price the buyer will pay, transferring cost overrun risk to the supplier.
In the context of supplier risk, 'geographic concentration risk' refers to:
Answer: Relying on suppliers clustered in the same region, exposing the buyer to regional disruptions
Geographic concentration risk arises when multiple suppliers are in the same area, meaning a regional disaster could disrupt all of them simultaneously.
An insurable interest in procurement means the buyer:
Answer: Has a financial stake in the goods that could be lost or damaged
Insurable interest exists when the insured party would suffer a financial loss if the insured property is damaged or lost.
Which risk transfer mechanism involves a third party guaranteeing a supplier's contractual performance?
Answer: Performance bond
A performance bond is a surety instrument where a third-party bonding company guarantees the supplier will fulfill its contractual obligations.
What is the difference between 'risk tolerance' and 'risk appetite' in an organizational context?
Answer: Risk appetite is the amount of risk an organization is willing to accept; risk tolerance is the acceptable variation around that level
Risk appetite defines the broad level of risk accepted in pursuit of objectives, while risk tolerance specifies the permissible deviation from that level.
A purchasing team uses a 'spend analysis by supplier' to identify risk. Discovering that one supplier represents 65% of total spend primarily signals:
Answer: High supplier concentration risk requiring diversification
Extreme spend concentration with a single supplier creates significant supply continuity and bargaining risk if that supplier fails or raises prices.
Which underwriting factor is most relevant when evaluating a supplier's workers' compensation insurance adequacy?
Answer: The number and classification of employees and historical loss experience
Workers' compensation premiums and adequacy are based on payroll size, employee job classifications, and the employer's past claims history.