Free ARM Risk Financing and Insurance Questions and Answers

Question 1

What is the primary purpose of risk financing?

Accepted Answer

To provide funding for potential losses.

Answer

Risk financing focuses on how an organization will pay for the financial consequences of risks that materialize. Its primary purpose is to ensure that funds are available to cover potential losses, whether through internal mechanisms like self-insurance or external mechanisms like commercial insurance. It's about managing the financial impact, not eliminating the risks themselves.

Question 2

Which of the following is an example of risk retention?

Accepted Answer

Using self-insurance to cover losses.

Answer

Self-insurance is a form of risk retention where an organization sets aside its own funds to cover potential losses instead of purchasing a commercial insurance policy. This is a direct example of risk retention because the organization is choosing to bear the financial responsibility for its own risks, rather than transferring it to an insurer.

Question 3

How does risk transfer work in risk financing?

Accepted Answer

By transferring financial liability to an insurer.

Answer

In risk financing, risk transfer typically involves purchasing insurance. When an organization buys an insurance policy, it pays a premium to an insurer, and in return, the insurer agrees to assume the financial liability for specified losses that occur. This shifts the financial burden of potential risks from the insured organization to the insurance company.

Question 4

What is the primary benefit of insurance in risk financing?

Accepted Answer

Providing financial protection against losses.

Answer

The primary benefit of insurance in risk financing is to provide financial protection. By paying a relatively small, predictable premium, an organization can protect itself from potentially large and unpredictable financial losses that could arise from covered risks. This helps stabilize finances and ensures business continuity after an adverse event.

Question 5

Which factor should be considered when selecting an insurance policy?

Accepted Answer

The policy coverage and exclusions.

Answer

When selecting an insurance policy, the most crucial factor is understanding what risks are covered (coverage) and, equally important, what risks are specifically not covered (exclusions). A thorough review of these details ensures the policy aligns with the organization's specific risk exposures and provides the necessary protection, preventing unexpected gaps in coverage.

ARM - Associate in Risk Management Practice Test

ARM - Associate in Risk Management Practice Test

Free ARM Risk Financing and Insurance Questions and Answers