CFC CFC Risk Management & Insurance 2 — Questions and Answers
Question 1: Which financial statement ratio is most commonly used to assess a company's ability to absorb unexpected losses and gauge financial risk?
- Debt-to-equity ratio (Correct answer)
- Current ratio
- Asset turnover ratio
- Dividend payout ratio
Correct answer: Debt-to-equity ratio
The debt-to-equity ratio measures financial leverage and indicates how much debt the company uses relative to equity, which directly reflects its capacity to withstand losses.
Question 2: What is 'key person' insurance in the context of financial risk management?
- Life/disability insurance on critical employees whose loss would financially harm the company (Correct answer)
- Health insurance for the CFO
- Insurance covering employee theft
- Directors and Officers liability coverage
Correct answer: Life/disability insurance on critical employees whose loss would financially harm the company
Key person insurance compensates the company financially for the economic loss caused by the death or disability of an employee critical to business operations.
Question 3: In a risk heat map, risks plotted in the upper-right quadrant represent which combination?
- High likelihood and high impact (Correct answer)
- Low likelihood and high impact
- High likelihood and low impact
- Low likelihood and low impact
Correct answer: High likelihood and high impact
The upper-right quadrant of a risk heat map represents risks that are both highly likely to occur and would have severe impact, making them the highest priority for management response.
Question 4: A controller discovers the company has uninsured exposure to business interruption losses. Which insurance product directly addresses this risk?
- Business Interruption Insurance (Correct answer)
- General Liability Insurance
- Commercial Property Insurance
- Umbrella Insurance
Correct answer: Business Interruption Insurance
Business Interruption Insurance (also called business income insurance) covers lost revenue and ongoing expenses when a covered event disrupts normal business operations.
Question 5: What is 'value at risk' (VaR) used to measure in financial risk management?
- The maximum potential loss over a given time period at a specified confidence level (Correct answer)
- The total insured value of company assets
- The cost of transferring risk to insurers
- The net present value of risk mitigation investments
Correct answer: The maximum potential loss over a given time period at a specified confidence level
VaR quantifies the maximum expected loss over a defined period (e.g., one day) that will not be exceeded with a specified probability (e.g., 95% confidence).
Question 6: Which risk management technique involves accepting a risk and setting aside financial reserves to cover potential losses without purchasing insurance?
- Self-insurance / risk retention (Correct answer)
- Risk avoidance
- Risk transfer
- Risk hedging
Correct answer: Self-insurance / risk retention
Self-insurance (risk retention) means the company deliberately retains a risk and funds potential losses internally, often through a captive insurance program or reserve account.
CFC CFC Risk Management & Insurance 2
Which financial statement ratio is most commonly used to assess a company's ability to absorb unexpected losses and gauge financial risk?