The Chief Risk Officer within a large manufacturing organisation has been asked by the Board of Directors to provide an example of a pure risk. A suitable example would be
Answer(s): A
A fire occurring in a new manufacturing process line is an example of a pure risk, which is a situation that can only end in a loss12. For example, the fire could damage property, injure workers or disrupt operations.
How does a pure risk differ from a speculative risk?
Answer(s): D
A pure risk only leads to the possibility of a loss, whereas a speculative risk may lead to a gain12. For example, entering into a contract to purchase a new factory is a speculative risk, as it could result in either profit or loss depending on market conditions.
What could a financial organisation make primary use of, to assess whether its risk management systems are likely to fail?
Answer(s): B
Key risk indicators are metrics that provide information about potential changes in the level of risk exposure3. They can help an organisation monitor and manage its risks more effectively. Key control indicators are metrics that measure the performance of internal controls4.
A large manufacturing organisation has renewed an insurance policy and has accepted a significant increase in the policy deductible. What is this most likely to indicate?
A large manufacturing organisation has renewed an insurance policy and has accepted a significant increase in the policy deductible. This is most likely to indicate increased risk retention, which means accepting more responsibility for potential losses5. This could be done to reduce insurance premiums or increase control over claims.
What is a primary benefit of a commercial customer self-insuring a risk?
Answer(s): C
A primary benefit of a commercial customer self-insuring a risk is that its short-term cash-flow position is likely to improve. This is because self-insurance reduces or eliminates insurance premiums and administrative costs associated with external insurers.
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