Risk Management and Insurance Flashcards
7 cards from real NAB practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management and Insurance flashcards as text
What is the key difference between 'pure risk' and 'speculative risk' in risk management?
Answer: Pure risk involves only the possibility of loss or no loss, while speculative risk involves the possibility of gain or loss
Pure risks have outcomes of loss or no loss (e.g., fire), while speculative risks involve opportunities for both gain and loss (e.g., investments).
Which of the following best describes 'moral hazard' in insurance?
Answer: The tendency for insured parties to take on more risk because they are protected against loss
Moral hazard occurs when insurance coverage changes the behavior of the insured, leading them to take greater risks than they otherwise would.
In risk management, Value at Risk (VaR) is defined as:
Answer: The maximum expected loss over a specific time period at a given confidence level
VaR estimates the maximum potential loss a portfolio could face over a defined period given a specified confidence level (e.g., 95% or 99%).
A professional indemnity insurance policy primarily covers:
Answer: Claims arising from professional negligence, errors, or omissions in the provision of services
Professional indemnity insurance protects professionals against claims from clients alleging negligence or mistakes in the services provided.
The 'four Ts' framework for treating identified risks includes transfer, terminate, tolerate, and:
Answer: Treat (further)
The four Ts of risk response are: Transfer (shift risk to another party), Terminate (avoid the activity), Tolerate (accept the risk), and Treat (implement controls to reduce it).
What is 'adverse selection' in the context of insurance underwriting?
Answer: The tendency for higher-risk individuals to be more likely to seek insurance coverage
Adverse selection occurs when those most likely to make claims are also those most likely to purchase insurance, skewing the risk pool.
Which risk category includes risks arising from inadequate or failed internal processes, people, and systems or from external events?
Answer: Operational risk
Operational risk, as defined by Basel II/III, encompasses losses from failed internal processes, human error, system failures, and external events like fraud.