PGI Risk Management Principles 2 — Questions and Answers
Question 1: What is 'operational risk' in the context of risk management?
- The risk of business operations being profitable
- The risk of loss resulting from inadequate or failed internal processes, people, systems, or from external events (Correct answer)
- The risk of changing market conditions
- The risk of legal disputes with customers
Correct answer: The risk of loss resulting from inadequate or failed internal processes, people, systems, or from external events
Operational risk is the risk of loss from failures in internal processes, people (human error, fraud), systems (IT failures), or from external events (natural disasters, cyber attacks). It is distinct from financial risks like market and credit risk.
Question 2: What is 'catastrophe modelling' and why is it important for insurers?
- Modelling the financial consequences of a business catastrophe
- Using probabilistic computer models to estimate the frequency, severity, and potential losses from catastrophic events, informing underwriting, pricing, and reinsurance decisions (Correct answer)
- Modelling the marketing impact of a public relations catastrophe
- Setting operational procedures for catastrophic claim volumes
Correct answer: Using probabilistic computer models to estimate the frequency, severity, and potential losses from catastrophic events, informing underwriting, pricing, and reinsurance decisions
Catastrophe modelling uses probabilistic models incorporating physical event parameters (wind speed, ground motion) and exposure data to estimate the distribution of losses from catastrophic events. Insurers use it for pricing, accumulation management, and reinsurance purchasing.
Question 3: What is 'supply chain risk' and how does it create insurance exposure?
- Risk from competitors in the same supply chain
- Risk that disruptions in the supply chain interrupt the insured's business, creating contingent business interruption exposure even when the insured's own premises are undamaged (Correct answer)
- Risk of price changes in raw materials
- Risk of labour disputes at the insured's premises
Correct answer: Risk that disruptions in the supply chain interrupt the insured's business, creating contingent business interruption exposure even when the insured's own premises are undamaged
Supply chain risk arises when disruptions at upstream suppliers or downstream distributors interrupt the insured's business operations, even when the insured's own premises are undamaged. This creates contingent business interruption exposure.
Question 4: What is a 'risk heat map' used for in enterprise risk management?
- Mapping the physical locations of fire risks
- A visual tool plotting risks on a matrix by likelihood and impact, allowing prioritization of risk treatment efforts (Correct answer)
- A map showing the geographic distribution of insured properties
- Tracking temperature-related risks in storage facilities
Correct answer: A visual tool plotting risks on a matrix by likelihood and impact, allowing prioritization of risk treatment efforts
A risk heat map plots identified risks on a two-dimensional matrix (likelihood vs. impact), using color coding to visually prioritize which risks require immediate attention versus those that can be monitored or accepted.
Question 5: What is 'counterparty risk' in the context of insurance arrangements?
- Risk that insured parties will increase premiums
- Risk that the insurer, reinsurer, or other counterparty fails to meet their financial obligations under a contract (Correct answer)
- Risk of competitors offering better products
- Risk of customer complaints
Correct answer: Risk that the insurer, reinsurer, or other counterparty fails to meet their financial obligations under a contract
Counterparty risk in insurance is the risk that the other party (insurer, reinsurer, cedant) fails to fulfill its financial obligations — for example, an insolvent reinsurer failing to pay claims, leaving the cedant exposed.
Question 6: What is the ISO 31000 framework's approach to risk management?
- A compliance checklist for financial institutions only
- A universal risk management framework providing principles, a framework, and a process applicable to any organization of any size or sector (Correct answer)
- A framework applicable only to manufacturing companies
- A Singapore-specific risk management standard
Correct answer: A universal risk management framework providing principles, a framework, and a process applicable to any organization of any size or sector
ISO 31000 provides universal principles, a framework, and a process for managing risk, applicable to organizations of any type, size, sector, and risk profile. It is not prescriptive but provides guidance adaptable to each organization's context.
PGI Risk Management Principles 2
What is 'operational risk' in the context of risk management?