RIMS Portfolio Management & Strategy 3 — Questions and Answers
Question 1: A risk manager uses a 'heat map' in portfolio strategy primarily to:
- Track insurance renewal dates and premium payments
- Visualize risks by likelihood and potential impact for prioritization (Correct answer)
- Calculate exact dollar loss values for each risk category
- Determine which risks qualify for captive financing
Correct answer: Visualize risks by likelihood and potential impact for prioritization
A heat map plots risks on axes of likelihood and impact, enabling management to quickly identify and prioritize the highest-priority exposures.
Question 2: Which approach to risk portfolio strategy involves spreading risk exposures across multiple insurers and financing mechanisms to avoid over-reliance on a single counterparty?
- Risk concentration
- Risk diversification (Correct answer)
- Risk escalation
- Risk avoidance
Correct answer: Risk diversification
Risk diversification distributes exposures across multiple insurers, captives, and financing vehicles to reduce counterparty concentration and improve portfolio resilience.
Question 3: Total Cost of Risk (TCOR) includes all of the following EXCEPT:
- Insurance premiums paid
- Retained losses and self-insured claims
- Risk management administrative costs
- Revenue generated from new product lines (Correct answer)
Correct answer: Revenue generated from new product lines
TCOR encompasses premiums, retained losses, and risk management administration costs, but not revenue from new products, which is an income metric unrelated to risk financing costs.
Question 4: When evaluating a multi-year insurance program as part of portfolio strategy, the primary advantage over annual policies is:
- Unlimited coverage limits at a fixed premium
- Greater premium stability and reduced renewal uncertainty over the program period (Correct answer)
- Elimination of the insurer's right to cancel coverage
- Automatic adjustment of limits to match inflation
Correct answer: Greater premium stability and reduced renewal uncertainty over the program period
Multi-year programs lock in terms and premiums for several years, providing budget predictability and protection against market hardening at renewal.
Question 5: In risk portfolio strategy, 'risk tolerance' differs from 'risk appetite' in that risk tolerance:
- Represents the board's high-level willingness to accept risk
- Specifies the acceptable variation around risk appetite thresholds for individual risks (Correct answer)
- Is set by regulators rather than the organization
- Applies only to financial risks, not operational ones
Correct answer: Specifies the acceptable variation around risk appetite thresholds for individual risks
Risk tolerance defines the acceptable deviation from the risk appetite at the operational level, providing specific boundaries for individual risk categories.
Question 6: A construction firm faces both property damage risk and contract performance risk on large projects. Bundling these into a single integrated insurance program is known as:
- Finite risk insurance
- Integrated risk program (Correct answer)
- Parametric insurance
- Retrospective rating
Correct answer: Integrated risk program
An integrated risk program combines multiple coverage lines into a single policy or program structure, often reducing total premium through portfolio effects and administrative efficiencies.
Question 7: Which risk financing strategy is most appropriate for a low-frequency, high-severity catastrophic exposure that could threaten organizational solvency?
- Self-insurance through a funded reserve
- Risk retention through a high-deductible program
- Transfer via catastrophe (CAT) insurance or reinsurance (Correct answer)
- Risk avoidance by exiting the business line entirely
Correct answer: Transfer via catastrophe (CAT) insurance or reinsurance
Low-frequency, high-severity catastrophic risks that threaten solvency are best addressed through risk transfer mechanisms such as catastrophe insurance or reinsurance, which cap the organization's maximum loss.
RIMS Portfolio Management & Strategy 3
A risk manager uses a 'heat map' in portfolio strategy primarily to: