ARM Risk Control and Mitigation Strategies 2 — Questions and Answers
Question 1: A manufacturer installs an automatic sprinkler system in its warehouse. Which risk control technique does this primarily represent?
- Loss prevention
- Loss reduction (Correct answer)
- Avoidance
- Separation
Correct answer: Loss reduction
Sprinklers do not stop fires from starting but limit the severity of fire losses once they occur, which is loss reduction.
Question 2: Which risk control technique is the only one that reduces the probability of loss from a specific activity to zero?
- Loss prevention
- Diversification
- Avoidance (Correct answer)
- Duplication
Correct answer: Avoidance
Avoidance eliminates the exposure entirely by abandoning or never undertaking the activity, so the chance of loss becomes zero.
Question 3: A company stores backup copies of critical records at an off-site data center that is used only if the primary records are destroyed. This is an example of:
- Separation
- Diversification
- Loss prevention
- Duplication (Correct answer)
Correct answer: Duplication
Duplication keeps spare or backup assets that are not used in daily operations and are activated only after a loss.
Question 4: A retailer spreads its inventory across four warehouses that are all used in daily operations. Which technique is being applied?
- Separation (Correct answer)
- Duplication
- Avoidance
- Loss prevention
Correct answer: Separation
Separation disperses assets that are actively used in operations so that a single event cannot damage them all.
Question 5: Under Haddon's energy release theory, requiring workers to wear hard hats is best described as a strategy that:
- Prevents the creation of the hazard
- Reduces the amount of energy created
- Separates the energy from the person with a physical barrier (Correct answer)
- Prevents the release of the energy
Correct answer: Separates the energy from the person with a physical barrier
A hard hat places a barrier between the released energy and the person exposed to it.
Question 6: Which of the following is the primary difference between risk control and risk financing?
- Risk control applies only to property exposures, while risk financing applies to liability exposures
- Risk control reduces loss frequency or severity, while risk financing generates funds to pay for losses that occur (Correct answer)
- Risk control is always cheaper than risk financing
- Risk financing eliminates exposures, while risk control funds them
Correct answer: Risk control reduces loss frequency or severity, while risk financing generates funds to pay for losses that occur
Risk control alters the frequency or severity of losses, whereas risk financing provides the money to pay for losses that still occur.
Question 7: A firm decides to stop selling a product line because of severe product liability claims, but customers still own units sold in prior years. What is the main limitation of the avoidance decision here?
- Avoidance cannot be applied to product lines
- Avoidance increases the frequency of future claims
- Avoidance transfers the exposure to the customers
- Avoidance does not eliminate liability exposures from products already sold (Correct answer)
Correct answer: Avoidance does not eliminate liability exposures from products already sold
Abandoning an activity prevents new exposures, but losses from units already in circulation can still occur.
