CGFO Risk Management 2 ā Questions and Answers
Question 1: Which risk management strategy involves transferring the financial consequences of a loss to a third party?
- Risk avoidance
- Risk retention
- Risk transfer (Correct answer)
- Risk reduction
Correct answer: Risk transfer
Risk transfer shifts the financial burden of a loss to another party, most commonly through insurance contracts or contractual indemnification clauses.
Question 2: In government risk management, what is an 'exposure' most accurately defined as?
- The deductible amount on an insurance policy
- The possibility of financial harm from a specific hazard (Correct answer)
- The total premium paid for coverage
- The documented list of past losses
Correct answer: The possibility of financial harm from a specific hazard
An exposure is the condition or situation that creates the possibility of financial loss, such as owning a fleet of vehicles or operating a public pool.
Question 3: A government entity self-insures its workers' compensation program and sets aside funds in a dedicated internal account. This is an example of:
- Commercial risk transfer
- Funded risk retention (Correct answer)
- Unfunded risk retention
- Pooled risk sharing
Correct answer: Funded risk retention
Funded risk retention occurs when the entity retains the risk but establishes reserves or a dedicated fund to pay anticipated losses.
Question 4: Which document formally outlines a government's risk management program goals, scope, and authority?
- Risk register
- Loss run report
- Risk management policy statement (Correct answer)
- Actuarial valuation report
Correct answer: Risk management policy statement
A risk management policy statement establishes the framework, objectives, and organizational authority for the entity's entire risk management program.
Question 5: When a municipality requires contractors to name the city as an 'additional insured' on their liability policy, this is primarily intended to:
- Reduce the contractor's premium costs
- Provide the city coverage for claims arising from contractor operations (Correct answer)
- Allow the city to manage the contractor's insurance program
- Transfer all project risk to the contractor's insurer
Correct answer: Provide the city coverage for claims arising from contractor operations
Additional insured status extends the contractor's liability coverage to the municipality for claims arising out of the contractor's work on behalf of the city.
Question 6: Which of the following best describes 'moral hazard' in the context of government insurance programs?
- The risk that a natural disaster will cause catastrophic losses
- The tendency to take greater risks because losses are covered by insurance (Correct answer)
- The probability that a vendor will commit fraud
- The risk of regulatory non-compliance penalties
Correct answer: The tendency to take greater risks because losses are covered by insurance
Moral hazard refers to the behavioral changeāincreased risk-takingāthat occurs when individuals or entities are insulated from the consequences of their actions by insurance.
Question 7: A government's risk manager reviews five years of property loss data to forecast future losses. This technique is known as:
- Prospective risk assessment
- Trending loss data (Correct answer)
- Actuarial credibility weighting
- Exposure base analysis
Correct answer: Trending loss data
Trending loss data involves adjusting historical losses for inflation and other changes to project future loss costs with greater accuracy.
CGFO Risk Management 2
Which risk management strategy involves transferring the financial consequences of a loss to a third party?