Insurance Risk Assessment & Management 2 — Questions and Answers
Question 1: Which risk management technique involves transferring the financial consequences of a loss to another party?
- Risk avoidance
- Risk retention
- Risk transfer (Correct answer)
- Risk reduction
Correct answer: Risk transfer
Risk transfer shifts the financial burden of a potential loss to another party, most commonly through insurance or contractual agreements.
Question 2: A manufacturer installs sprinkler systems in its warehouse to reduce fire damage. This is an example of:
- Risk avoidance
- Loss reduction (Correct answer)
- Risk transfer
- Speculative risk
Correct answer: Loss reduction
Loss reduction measures are implemented to minimize the severity of a loss after it occurs, such as sprinkler systems limiting fire damage.
Question 3: What is the primary purpose of a risk register in enterprise risk management?
- To calculate insurance premiums
- To document identified risks, their likelihood, and potential impact (Correct answer)
- To transfer risks to third parties
- To eliminate all pure risks
Correct answer: To document identified risks, their likelihood, and potential impact
A risk register is a tool used to record and track identified risks, including their probability, potential impact, and mitigation strategies.
Question 4: Which of the following best describes a 'peril' in insurance terminology?
- A condition that increases the likelihood of a loss
- The direct cause of a loss (Correct answer)
- The financial impact of a loss
- A method for reducing risk exposure
Correct answer: The direct cause of a loss
A peril is the direct cause of a loss, such as fire, flood, theft, or accident.
Question 5: An insurance company uses reinsurance to manage its exposure to catastrophic losses. This is an example of:
- Risk avoidance
- Risk retention
- Risk transfer (Correct answer)
- Loss prevention
Correct answer: Risk transfer
Reinsurance is a form of risk transfer in which an insurer cedes a portion of its risk to another insurer (reinsurer) in exchange for a premium.
Question 6: Which method of handling risk is most appropriate when the probability and severity of loss are both very low?
- Risk avoidance
- Risk transfer
- Risk retention (Correct answer)
- Risk reduction
Correct answer: Risk retention
Risk retention is most suitable for low-frequency, low-severity risks where the cost of transfer or reduction outweighs the expected loss.
Question 7: What does the term 'loss severity' refer to in risk assessment?
- How frequently losses occur
- The dollar amount or financial impact of a loss (Correct answer)
- The number of people affected by a loss
- The time required to recover from a loss
Correct answer: The dollar amount or financial impact of a loss
Loss severity measures the financial magnitude or dollar impact of a loss event when it occurs.
Insurance Risk Assessment & Management 2
Which risk management technique involves transferring the financial consequences of a loss to another party?