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ARM 402 Questions & Correct Solutions (Expert Answered)
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ARM 402 Questions & Correct Solutions (Expert Answered)
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ARM 402 Questions & Correct Solutions (ExpertAnswered)
Risk treatment Right Ans - -the selection and implementation of actions to
help manage or mitigate a risk
-a continual process that entails examining each option in terms of whether it
leads to a tolerable level or residual risk or helps the org maximize the
potential benefits of an opportunity
-treatments are not mutually exclusive
-cost of each treatment option should be weighed against its potential benefits
(cost-benefit analysis)
Risk treatment techniques Right Ans - 1. avoid the risk: stopping or
canceling the activity
2. modify the risk: increasing or decreasing an event's likelihood and/or
consequences that will result in positive or negative outcomes; loss
prevention or loss reduction
3. transfer the risk: sharing the risk with, or moving it entirely to, another
party; insurance or outsourcing
4. retain the risk: accepting and absorbing some or all of the consequences of
the risk; used when potential negative consequences are low
5. exploit the risk: taking actions to maximize the expected gains of
opportunities; actions to exploit risks can create more risks
The Prouty Approach Right Ans - -a way to select a risk treatment
-analyzes a risk's loss likelihood and impact to determine a proper treatment
-when a risk's likelihood and impact could be accurately estimated, risk
managers could use a matrix to determine which treatment method would be
best
-four categories of loss likelihood: almost nil, slight, moderate, definite
-three categories of loss impact: slight, significant, severe
-matrix communicates and justifies priority of a risk
-similar concept to a heat map
-activities with losses that have a slight change of occurring and are of low
impact tend to be retained and accounted for in the budget
-activity with high likelihood and intolerable impact is typically avoided
-in the middle: typically call for modification
,risk treatment plan Right Ans - -once or selects a risk treatment technique,
it needs to develop a risk treatment plan to outline how the org will
implement and monitor the technique
-to be effective, plan needs each of these elements:
*explanation of treatment technique
*proposed actions: document proposed actions and how they will be
prioritized
*resource requirements: identify resources required
*roles and responsibilities: determine involvement and accountability
*timeline
*monitoring requirements: indicate how performance will be measured,
monitored, and reported to upper management
risk financing Right Ans - -a risk management technique that includes steps
to pay for or transfer the cost of losses
-must be a part of every org's holistic risk management strategy
-the more risk an org retains to pursue opportunities, the more funds it must
allocate to finance those risks
-these funds are then used to apply risk treatments
technology's impact on risk modification Right Ans - -IoT devices, sensors,
wearables, and telematics allow orgs to accurately identify patterns of risk,
model risk, and predict risk
-in some cases, risk can be predicted so accurately that it can be modified to
the point of being nearly preventable; can create significant cost savings for
orgs and insurers
-insurers could charge a lower premium if you have sensors or something like
that in place; but they do come with their own risk
-advancements in forecasting could result in minimal financing being required
to retain, transfer, or modify negative risks
-must factor in that there is a cost associated with forecasting technology
Technology's impact on Risk Transfer Right Ans - -growing access to big
data, machine learning and AI have made it easier for insurers to predict, plan
for risk, and to develop products that specifically address certain risks
-insurers can price policies more precisely
-insurers have the ability to create alternative products: parametric insurance
was too costly for such small events, but now it can all be processed
electronically making it worth it
,Technology's impact on Financial Transactions Right Ans - -smart
contracts and blockchain
-technology is constantly speeding up the recovery process of orgs of
recouping financial losses and regaining the position it was in before the loss
occurred
-smart insurance contracts can dramatically increase the speed of loss
payments, as well as reduce administrative costs for insurers
-ex: if the blockchain receives a signal that a flood has occurred in your area
(could come from sensors), the blockchain could instantly determine whether
your business is covered for a flood loss. having detected that your business
has coverage, a loss payment could be deposited directly into your org's bank
account. the claim, verification of coverage, and payment could be completed
within seconds rather than days or weeks
risk treatment applications Right Ans - -risk management professionals
will likely treat risks differently depending on the quadrants they fall into
separation & duplication Right Ans - -separation: a type of modification
that disperses a particular asset or activity over several locations; can reduce
an org's dependence on a single asset, activity, or person, making individual
losses smaller
-duplication: a type of modification that duplicates exposure units; can reduce
dependence and making losses smaller also
-drawback with both is that separation and duplication create an additional
risk: the second server could be breached
holistic risk treatment Right Ans - -an approach to treating all of an org's
risks and opportunities in a way that uses available resources as efficiently as
possible to maximize outcomes
-sometimes there is resistance from department heads and decision makers
when it comes to sharing info
-knowing how one risk treatment can affect another can be particularly
valuable to decision makers
-in a holistic approach, gains in one area of an org can be used to offset losses
from another (could eliminate the need to treat the risk resulting in a loss)
-siloed approach: org would dedicate resources to treat the risk resulting in a
loss without considering the possible gains in another area, potentially
resulting in the org's treating the negative risk unnecessarily
, -a way to picture this is with a chart that compares a pure risk with a
speculative risk. on their own, each risk only has two possible outcomes;
together, the two risks can have four possible outcomes
-when an org analyzes its risk financing holistically across the enterprise, it
may find inconsistencies in its approach to treating risk
elements of a successful holistic risk treatment program Right Ans - 1.
involvement from entire org: willing to share info, making risk management a
priority
2. an organizational and departmental structure that facilitates managing
risks as a group: departments need to look beyond their own risks
3. risk treatment policies that cross departmental barriers
4. measurements that consider the entire org
5. visible engagement from upper management
6. risk treatment performance measures
correlation and covariance in holistic risk management Right Ans - -both
assess how one risk factor affects another and are useful for selecting risks or
opportunities to offset other risks
-covariance: measures how two variables will change in relation to each other;
used when there are two sets of data and he or she wants to see if they are
connected to each other
-correlation: scaled version of covariance expressed as a number from -1 to
+1; measures the degree to which two variables are related; indicates the
strength of their relationship
-when a risk professional considers how a risk interacts with other risks,
correlation is typically reported in the form of a matrix, which shows the
correlation for pairs of risks
-matrix always has a value of +1 along the diagonal because a risk sources is
always perfectly correlated with itself
-only one side of matrix is filled in because the other side would be a mirror
image of the completed side
-sources of risk that have a low positive correlation, no correlation, or
negative correlation with other risk sources in a portfolio are generally good
risk sources to add to the portfolio bc they tend to improve the org's risk-
return position by increasing the portfolio's risk diversification
How to deliver your message Right Ans - -convey the right nonverbal
message: tone of voice, level of eye contact, body language
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