ARM Risk Identification and Analysis 2 — Questions and Answers
Question 1: A risk manager reviews a manufacturer's balance sheet to find assets that could be damaged or destroyed. Which risk identification method is being used?
- Hazard analysis
- Flowchart analysis
- Loss history analysis
- Financial statement analysis (Correct answer)
Correct answer: Financial statement analysis
Financial statement analysis uses the balance sheet, income statement, and cash flow statement to reveal assets, liabilities, and income streams exposed to loss.
Question 2: Which risk identification method is MOST useful for revealing bottlenecks where a single loss could halt an entire production process?
- Compliance review
- Risk assessment questionnaires
- Flowchart analysis (Correct answer)
- Document analysis of contracts
Correct answer: Flowchart analysis
Flowcharts map the movement of goods or processes, exposing critical points and dependencies where a loss would interrupt operations.
Question 3: What is a key limitation of standardized risk assessment questionnaires?
- They only identify liability exposures
- They always require an actuary to interpret
- They cannot be completed by non-specialists
- They may miss exposures unique to the specific organization (Correct answer)
Correct answer: They may miss exposures unique to the specific organization
Standardized questionnaires are generic, so unusual or organization-specific exposures may not be captured.
Question 4: Which of the following is NOT one of the four elements of a loss exposure analysis framework used in ARM?
- Cause of loss (peril)
- Financial consequences of the loss
- Asset or item subject to loss
- The insurer's combined ratio (Correct answer)
Correct answer: The insurer's combined ratio
A loss exposure is described by the asset exposed, the cause of loss, the financial consequences, and the entity affected, not by an insurer's financial ratio.
Question 5: A firm's loss history shows only small, frequent losses over five years. What is the MAIN risk of relying solely on this data?
- Frequent losses are always overstated
- Loss history cannot be used for trend analysis
- Small losses must be excluded from analysis
- Low-frequency, high-severity exposures may be absent from the record (Correct answer)
Correct answer: Low-frequency, high-severity exposures may be absent from the record
Rare catastrophic events may not appear in a short loss history, so relying only on past losses can understate severe exposures.
Question 6: Reviewing a lease agreement to determine who is responsible for damage to the premises is an example of which identification method?
- Expert opinion
- Hazard analysis
- Flowchart analysis
- Document analysis (Correct answer)
Correct answer: Document analysis
Contracts such as leases are reviewed through document analysis to identify assumed or transferred loss exposures.
Question 7: Hazard analysis focuses primarily on which of the following?
- The organization's credit rating
- The present value of future cash flows
- Conditions that increase the frequency or severity of loss (Correct answer)
- Historical premium trends
Correct answer: Conditions that increase the frequency or severity of loss
Hazard analysis identifies conditions, such as poor housekeeping or wet floors, that increase the likelihood or severity of losses.
