APP Risk Assessment & Underwriting 2 — Questions and Answers
Question 1: In underwriting, what does 'adverse selection' refer to?
- Higher-risk applicants disproportionately seeking coverage (Correct answer)
- The insurer selecting unfavorable policy terms
- A decline in market share due to poor pricing
- The rejection of high-value claims by adjusters
Correct answer: Higher-risk applicants disproportionately seeking coverage
Adverse selection occurs when individuals with higher-than-average risk are more likely to purchase insurance, skewing the insured pool.
Question 2: Which underwriting approach evaluates each risk individually based on its unique characteristics rather than group statistics?
- Class underwriting
- Judgment underwriting (Correct answer)
- Schedule rating
- Experience rating
Correct answer: Judgment underwriting
Judgment underwriting relies on the underwriter's expertise to assess each risk on its own merits when standard rating tables are insufficient.
Question 3: A purchasing manager is assessing supply chain risk. Which tool provides a visual representation of potential failure points and their causes?
- Gantt chart
- Fishbone (Ishikawa) diagram (Correct answer)
- Balanced scorecard
- PERT network
Correct answer: Fishbone (Ishikawa) diagram
A fishbone diagram maps cause-and-effect relationships, helping identify root causes of potential supply chain failures.
Question 4: What is the primary purpose of a risk register in procurement?
- To document all vendor invoices
- To track identified risks, their likelihood, and mitigation plans (Correct answer)
- To record insurance policy numbers
- To list all approved suppliers
Correct answer: To track identified risks, their likelihood, and mitigation plans
A risk register is a living document that captures identified risks, their probability and impact, owners, and planned responses.
Question 5: When calculating Value at Risk (VaR) for a procurement portfolio, a 95% confidence level over 30 days means:
- Losses will never exceed the VaR amount
- There is a 5% chance losses will exceed the VaR amount in that period (Correct answer)
- The portfolio will gain value 95% of the time
- 95% of suppliers will not default
Correct answer: There is a 5% chance losses will exceed the VaR amount in that period
VaR at 95% confidence means there is a 5% probability that actual losses will exceed the stated amount during the specified period.
Question 6: Which type of insurance covers losses resulting from a supplier's failure to deliver goods on time?
- Product liability insurance
- Trade credit insurance
- Contingent business interruption insurance (Correct answer)
- General liability insurance
Correct answer: Contingent business interruption insurance
Contingent business interruption (CBI) insurance covers revenue losses caused by disruptions at a supplier's or customer's location.
Question 7: In risk matrix methodology, a risk rated 'High Likelihood / Low Impact' should primarily be treated with which strategy?
- Transfer via insurance
- Accept and monitor
- Avoid by canceling the activity
- Mitigate to reduce likelihood (Correct answer)
Correct answer: Mitigate to reduce likelihood
High-likelihood, low-impact risks are best addressed through mitigation controls that reduce how frequently they occur.
APP Risk Assessment & Underwriting 2
In underwriting, what does 'adverse selection' refer to?