RIMS Financial Analysis & Planning 3

Question 1

A risk manager is evaluating whether to purchase an umbrella policy or increase primary limits. Which financial concept is central to this decision?

Accepted Answer

Marginal cost of additional coverage versus marginal benefit of risk transfer

Answer

The decision hinges on comparing the incremental premium cost of higher limits against the incremental protection value for low-probability, high-severity losses.

Question 2

In insurance budgeting, which method allocates costs to business units based on each unit's proportional share of total insured exposure?

Accepted Answer

Pro-rata allocation by exposure

Answer

Pro-rata allocation distributes insurance costs in proportion to each unit's share of a measurable exposure base such as payroll, revenue, or property values.

Question 3

Which metric measures the variability of actual losses around expected losses and is critical in sizing retained risk?

Accepted Answer

Coefficient of variation

Answer

The coefficient of variation (standard deviation divided by mean) measures relative volatility and helps risk managers understand how unpredictable retained losses may be.

Question 4

When a risk financing program uses an aggregate stop-loss arrangement, what does the stop-loss protect against?

Accepted Answer

Total losses in a policy period exceeding a defined aggregate threshold

Answer

An aggregate stop-loss caps cumulative losses over a policy period, protecting the insured when many smaller losses collectively exceed the aggregate retention.

Question 5

Which of the following is an advantage of a finite risk insurance program from a financial planning perspective?

Accepted Answer

It provides multi-year smoothing of loss volatility and improves cash flow predictability

Answer

Finite risk programs spread losses over multiple years, reducing the income statement volatility caused by large single-year losses and improving financial planning accuracy.

(RIMS) Risk and Insurance Management Society Certification Practice Test

(RIMS) Risk and Insurance Management Society Certification Practice Test

RIMS Financial Analysis & Planning 3