RIMS Portfolio Management & Strategy 2 — Questions and Answers
Question 1: In risk portfolio management, what does 'risk aggregation' primarily involve?
- Combining individual risk exposures to understand total organizational risk (Correct answer)
- Separating risks into distinct silos for independent management
- Purchasing multiple insurance policies for the same exposure
- Delegating risk decisions to individual business units
Correct answer: Combining individual risk exposures to understand total organizational risk
Risk aggregation combines individual risk exposures across the enterprise to reveal total risk concentration, correlations, and net organizational impact.
Question 2: Which metric best measures the potential loss that a risk portfolio could suffer at a given confidence level over a specified time horizon?
- Expected value
- Value at Risk (VaR) (Correct answer)
- Return on Risk-Adjusted Capital (RORAC)
- Risk appetite threshold
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) quantifies the maximum potential loss at a specified confidence level (e.g., 95%) over a defined time horizon.
Question 3: A company decides to retain a higher level of risk in its portfolio to reduce insurance premiums. This strategy is best described as:
- Risk avoidance
- Risk transfer
- Risk retention (Correct answer)
- Risk reduction
Correct answer: Risk retention
Risk retention involves deliberately keeping risk exposures in-house, often through higher deductibles or self-insurance, to lower the cost of transferred risk.
Question 4: When constructing a risk portfolio strategy, 'correlation' between risks is important because:
- Correlated risks cancel each other out, reducing total exposure
- Highly correlated risks can compound losses when multiple events occur simultaneously (Correct answer)
- Correlation determines the premium charged by insurers
- Uncorrelated risks must always be transferred to third parties
Correct answer: Highly correlated risks can compound losses when multiple events occur simultaneously
Highly correlated risks tend to materialize together, meaning simultaneous losses can exceed what independent analysis of each risk would suggest.
Question 5: Which of the following best describes a 'captive insurance company' as a portfolio strategy tool?
- A commercial insurer that specializes in one industry
- A subsidiary formed to insure the risks of its parent organization (Correct answer)
- A reinsurance arrangement between two unrelated companies
- A government-sponsored pool for catastrophic risks
Correct answer: A subsidiary formed to insure the risks of its parent organization
A captive is a wholly or partially owned insurance subsidiary created by a parent company to finance its own risk exposures rather than purchasing commercial coverage.
Question 6: In the context of enterprise risk management (ERM), a 'risk appetite statement' serves to:
- List every risk the organization is willing to eliminate
- Define the aggregate level and types of risk the organization will accept in pursuit of objectives (Correct answer)
- Specify exact dollar limits for every insurance policy purchased
- Authorize the risk manager to reject all new business initiatives
Correct answer: Define the aggregate level and types of risk the organization will accept in pursuit of objectives
A risk appetite statement articulates the board-approved level and types of risk the organization is willing to accept while pursuing its strategic goals.
Question 7: The 'efficient frontier' concept applied to a risk portfolio suggests that an optimal portfolio:
- Has the highest possible risk for a given level of expected cost
- Minimizes retained risk by transferring all exposures to insurers
- Achieves the lowest total cost of risk for a given level of retained exposure (Correct answer)
- Eliminates all correlation among covered risks
Correct answer: Achieves the lowest total cost of risk for a given level of retained exposure
Borrowing from portfolio theory, the efficient frontier in risk management identifies combinations of retained and transferred risk that minimize total cost of risk for each level of retained exposure.
RIMS Portfolio Management & Strategy 2
In risk portfolio management, what does 'risk aggregation' primarily involve?