PGI Risk Management Principles 2

Question 1

What is 'operational risk' in the context of risk management?

Accepted Answer

The risk of loss resulting from inadequate or failed internal processes, people, systems, or from external events

Answer

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?

Accepted Answer

Using probabilistic computer models to estimate the frequency, severity, and potential losses from catastrophic events, informing underwriting, pricing, and reinsurance decisions

Answer

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?

Accepted 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

Answer

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?

Accepted Answer

A visual tool plotting risks on a matrix by likelihood and impact, allowing prioritization of risk treatment efforts

Answer

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?

Accepted Answer

Risk that the insurer, reinsurer, or other counterparty fails to meet their financial obligations under a contract

Answer

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.

PGI Insurance Practice Test

PGI Insurance Practice Test

PGI Risk Management Principles 2