ARM 54 Practice Exam Questions with Correct Answers., Exams of Banking Law and Practice

Download ARM 54 Practice Exam Questions with Correct Answers. and more Exams Banking Law and Practice in PDF only on Docsity! ARM 54 Practice Exam Questions with Correct Answers. Risks from accidental loss, including the possibility of loss or no loss defines - Correct answer Hazard risk The traditional definition of risk management reflects the traditional concept of risk as - Correct answer Negative Which one of the following statements is true regarding the evolution of risk and risk management? - Correct answer The definition of risk has evolved to include positive as well as negative attributes The Dodd-Frank Act, Solvency II, and Basel III all have the purpose of reducing - Correct answer Systemic risk Which one of the following is a common risk management benefit the entire economy would realize as a consequence of a risk management program? - Correct answer Reduced waste of resources-Risk management reduces waste of resources. Allocating resources for potential losses is a cost because the resources cannot be used for other purposes that could promote growth. To an insured organization, which one of the following is an example of a cost of risk associated with an asset or activity? - Correct answer Cost of sprinkler systems One benefit of risk management to the economy is the reduction of the potential for a major disruption in the functioning of financial markets and the financial system. This risk that is reduced is called - Correct answer Systemic risk Which one of the following risk management program goals enhances an organization's reputation? - Correct answer Social responsibility-Social responsibility is the risk management program goal that will most likely enhance an organization's reputation. An organization must meet the standard of care that it owes to others in order to ensure that - Correct answer Legal obligations are satisfied-An organization must meet the standard of care that it owes to others in order to ensure that legal obligations are satisfied. Risk management programs should - Correct answer Operate economically and efficiently Which one of the following is essential to an effective risk management program? - Correct answer Support of the organization's senior management-Support of the organization's senior management is essential to an effective risk management program. Which one of the following provides a measure of the maximum potential damage associated with an occurrence? - Correct answer Exposure In an effort to grow its personal lines book, an insurer decides to offer discounts on homeowners and personal auto insurance to the employees of its largest business lines account. Which one of the following risk measures is most likely to increase as a result of this marketing decision? - Correct answer Correlation-The insurer's risk correlation will most likely increase as a result of this marketing decision. According to the law of large numbers, as the number of exposure units insured increases, - Correct answer The relative accuracy of predictions about future losses increases-According to the law of large numbers, as the number of exposure units insured increases, the relative accuracy of predictions about future losses increases. The relationship between which two basic measures is critical for risk management in assessing risk and deciding whether and how to manage it? - Correct answer Likelihood and consequences Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification? - Correct answer Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk-Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. George works for a large company and part of his job is to monitor assets according to their liquidity. George is particularly concerned that the company fleet cars are affecting its liquidity and rising fuel prices are having an adverse effect during tight economic markets. If George's concerns were categorized as causes of loss according to the quadrants of risk, his concern most directly relates to which one of the following types of risks? - Correct answer Financial risks Billy owns a beach front cottage which has become his primary residence. Billy's primary concern is that his home will be hit by a hurricane and badly damaged or even destroyed. For Billy, this hurricane risk is a - Correct answer Subjective risk Carol has worked as a payroll clerk for a small organization for 20 years. Over the years she received only two small salary increases and began to embezzle funds from the company since she felt she was not adequately compensated for her job efforts. In terms of the quadrants of risk, Carol's theft risk can be classified as - Correct answer Both a hazard risk and an operational risk-Carol's theft risk can be classified as both a hazard risk and an operational risk. Three main theoretical concepts explain how enterprise risk management (ERM) works. One theoretical concept considers not only the combination of individual risks but also their interactions. This theoretical concept is - Correct answer The portfolio theory Imposing higher standards of insurer risk management and governance is considered one of the three pillars of which one of the following regulatory standards? - Correct answer Solvency II Solvency II is a new regulatory standard in the European Union (EU) to establish principles for risk management and consistency in regulation for which one of the following industries? - Correct answer Insurance Based on Basel III principles, which one of the following groups should take the lead in establishing a strong risk management culture? - Correct answer Board of directors- Basel III is a comprehensive set of reform measures to strengthen the regulation, supervision, and risk management of the banking sector. Based on Basel III principles, the board of directors should take the lead in establishing a strong risk management culture. Fire, wind, theft, business interruption, sickness and disability, and liability claims are all considered - Correct answer Hazard risks-Fire, wind, theft, business interruption, sickness and disability, and liability claims are all considered hazard risks. The cause of loss is also referred to as a - Correct answer Peril Avoidance can be called proactive avoidance when the organization - Correct answer Decides not to assume a loss exposure in the first place-When an organization identifies a loss exposure and consciously decides to not assume it by avoiding it, then the avoidance is considered proactive. Because losses cannot be eliminated, an organization must decide whether to retain or transfer its loss exposures. Which one of the following describes losses which are typically retained? - Correct answer Losses with low frequency and low severity Tania has been unemployed for six months, and her unpaid bills are mounting. She recently damaged the front fender of her vehicle after running off the road. When seeking repairs to the vehicle, she convinced the auto body shop to include damages from previous incidents in the estimate. This would allow her to collect extra money from her insurer. From an insurance and risk management perspective, Tania's behavior is indicative of a - Correct answer Moral hazard Jim's Crab Hut restaurant has just added an extra seating section. The restaurant's risk manager is extremely concerned with the fact that this section requires customers to take a small step down to enter the section and it may be easy to miss the step and fall. This exposure of concern to the risk manager is a - Correct answer Liability loss exposure Jemma has two pairs of earrings she wants to ensure against theft. Jemma's earrings are categorized as - Correct answer Personal property Sydney's Paint and Body Shop has experienced an increase in its volume of business as well as an increase in inventory, supplies, and transactions. Sydney has not hired additional employees, nor have his profits substantially increased but he has noticed more clutter around the paint shop in terms of oily rags, supplies, paint, and waste. If Sydney viewed his business in terms of risk exposures, the exposures he would be most concerned about would be the - Correct answer Property loss exposures Commercial package policies typically include coverage for business property, liability, and - Correct answer Business income Jordan is risk manager of Burroughs Mills, a textiles and clothing company. Jordan just renewed the company's property insurance. The insurance that Jordan purchased on the company's warehouse covers all losses except those losses that are excluded. If a loss occurs, the insurer will take depreciation into consideration when determining the loss settlement. Which one of the following descriptions applies to the property insurance that Jordan purchased? - Correct answer Direct physical loss, actual cash value coverage The purpose of all workers compensation laws is to provide - Correct answer Medical and wage replacement benefits to injured employees A group of female employees at Third Federal Bank filed a lawsuit against the bank. The lawsuit alleges that the bank consistently failed to promote qualified women to senior management positions because of their gender. If the lawsuit is successful, which one of the following coverages would pay the damage award? - Correct answer Employment practices liability insurance Most general liability insurance policies include coverage for which one of the following? - Correct answer Product liability Which one of the following commonly used categories of operational risk includes risks associated with technology and equipment? - Correct answer Systems-Systems risk includes risks associated with technology and equipment. One category of operational risk that a business must manage is risk associated with people. One of the strategies to mitigate people risk is to use care when hiring employees. This strategy employs background checks, pre-employment tests, and checking references. This strategy is - Correct answer Selection-Using care when hiring people by performing criminal background checks and checking references is part of the selection process. Which one of the following categories of operational risk includes many risks which are hazard risks or other forms of insurable risk? - Correct answer People Insurance Company monitors key indicators of underwriting effectiveness. Some indicators they monitor include: percentage of business quoted that was written, application processing time, premium volume handled by underwriters, skill level of underwriters, and benchmarking between different underwriting offices. The indicators of underwriting performance Insurance Company uses are called - Correct answer Control indicators Chuck is Vice President of Claims for Insurance Company. The company has 37 adjusters in the field, and needs to hire four new adjusters. Chuck is curious about the relationship between prior experience of the adjuster and policyowner complaints. He collected data on the number of complaints for each adjuster on staff over time. Then he used a statistical technique to analyze the relationship between adjuster experience and complaints, and the trend of the relationship over time. The statistical analysis confirmed that that there were significantly fewer complaints with more experienced adjusters, and that the relationship grew stronger with more years of experience. The technique Chuck used to relate indicators to outcomes is called - Correct answer Regression analysis Which one of the following statements is true regarding key risk indicators (KRI)? - Correct answer A KRI must be leading, rather than lagging, to be effective. Risk that is common to all securities of the same general class and cannot be eliminated through diversification is called - Correct answer Systematic risk Which one of the following types of financial risk has only negative potential? - Correct answer Credit risk Which one of the following types of organization would most likely be affected by commodity price risk? - Correct answer A manufacturer A disadvantage of value-at-risk (VaR) is that VaR - Correct answer Does not accurately measure the extent to which a loss might exceed the threshold-VaR gives the probability but does not accurately measure the dollar value by which a loss might extend beyond the VaR threshold. Management of LMN Insurance Company is considering investing in the Stability- Growth Mutual Fund; however they are concerned about the volatility of the investment. The fund's manager said that on any given day, there is a 5% probability of losing more than 3% of the investment's worth. The statistic quoted by the fund manager is - Correct answer Value-at-risk Which one of the following is a benefit of the conditional value at risk (CVaR) method? - Correct answer It takes into account the extremely large losses that may occur. The level of capital required to provide a cushion against unexpected loss of economic value at a financial institution is known as - Correct answer Risk capital-The level of capital required to provide a cushion against unexpected reduction in the value of its capital is known as risk capital. last 12 years. Under the new plan, he was supposed to manage commodity price risk, currency exchange rate risk, and strategic risk. When Tom asked for assistance (hiring an outside expert, time to get up to speed on financial risk, etc.), his requests were denied. After six months, the president declared the ERM program a failure and told Tom to revert to the previous risk management plan. APC's experiment with ERM was not successful because of - Correct answer Lack of commitment of resources There are several steps in the enterprise-wide risk management process. One step includes determining the effectiveness of controls, observing changes in the internal and external environment, and obtaining information to improve risk assessments. This step in the enterprise risk management process is - Correct answer Monitor and assure A conscious act or decision not to act that reduces the frequency and severity of losses or makes losses more predictable best defines - Correct answer Risk control Which one of the following steps in the enterprise-wide risk management process includes an evaluation of how each of the organization's risk management processes aligns with its overall objectives? - Correct answer Scan the environment Selecting the appropriate risk management techniques is based on which one of the following? - Correct answer A forecast of the frequency and severity of expected losses Loss severity is usually measured in terms of - Correct answer Dollars Jancy Manufacturing has experienced an increase in employee injuries over the last three years. Jancy's risk manager has met with the various stakeholders throughout the organization and has the support of senior management to design and implement risk management framework and process. Which one of the following individuals would be the best person to communicate Jancy's commitment to risk management and employee safety? - Correct answer Chief Executive Officer Elliott is the new risk manager of Consolidated Agriculture Products. The company has corporate farms that grow grain in six Midwestern states. The company trades futures contracts on grain and foreign currencies. In an effort to establish accountability in the enterprise risk management program Elliott is implementing, he is using financial measures to determine potential losses from property damage, liability claims, farming operations, grain futures trading, currency futures trading, and each of the other loss exposures the company faces. These metrics of potential losses are called - Correct answer Key risk indicators Cromley Department Store has 30 stores located throughout the United States. An increase in the frequency and severity of general liability claims over the last three years has encouraged Cromley's risk manager to design and implement a risk management framework and process. Cromley has decided to replace the carpeting at several locations, purchase additional storage equipment, and train employees on premises safety. Cromley is in which one of the following stages of designing and implementing a risk management framework and process? - Correct answer Commitment of resources Myers Metal Company is a diversified organization with operations in the U.S., Europe, South America, and Africa. The company operates mines, metal foundries, and steel plants. The previous risk manager was fired and a new risk manager was just hired. The chief executive officer, chief financial officer, and company controller met with the new risk manager and asked her to design and implement an enterprise risk management (ERM) program. At the meeting, both the CEO and CFO expressed concern about acceptance of the new ERM approach. The risk manager suggested that a representative of the company should announce the change in risk management philosophy and attempt to get workers and managers to accept the new approach. Which one of the following officials would be best-positioned to announce the new approach and attempt to gain acceptance of it? - Correct answer Chief executive officer (CEO) Worthley's is a retail clothing store chain with 20 locations in the northeastern United States. Most of the stores are located in free standing buildings with parking lots. Wothley's has been experiencing an increase in the frequency and severity of general liability claims. Samuel, the risk manager, is in the early stages of designing and implementing a risk management framework and process. Which one of the following should be evaluated as part of Worthley's internal environment? - Correct answer The experience level of employees at the various stores The use of risk quadrants to identify and categorize risk provides a framework for - Correct answer Holistic risk identification Which one of the following risk identification techniques helps identify the interconnectedness of risk across organizational functions? - Correct answer Team approach The use of risk quadrants to identify and categorize risk can provide a framework for risk identification. One quadrant includes such risks as loss of production due to a key supplier not delivering raw materials or a mechanical breakdown of equipment. This risk quadrant is - Correct answer Operational risk Which one of the following is a disadvantage of using loss histories to identify risks? - Correct answer They are lagging rather than leading indicators of risk After a month in which three employees were seriously injured at company paper mills, Ashley, the risk manager of Bright White Paper Company, wanted some answers about the causes of employee injuries. Ashley independently contacted the plant manager and foreman at each of the company's plants. She asked each person to complete a confidential questionnaire regarding safety procedures. After receiving the responses to the questionnaire, Ashley summarized the results and asked the same questions again instructing each person to consider revising their responses based on the initial questionnaire results. The analysis revealed that new workers were not being properly trained and that a lax attitude toward safety was present at the majority of the plants. The team approach to risk identification Ashley employed is called - Correct answer The Delphi technique SE Industries has identified windstorm as a risk. The risk manager has assembled a team to project the potential consequences of windstorm. The team includes individuals from various functions within the organization. Which one of the following team approaches to risk identification is SE Industries using? - Correct answer Scenario analysis Which one of the following team approaches to risk identification involves a select group of experts in question-and-response cycles until a consensus is achieved? - Correct answer Delphi technique SoCal Movie Company produces movies at a studio in Southern California. The risk manager decided to identify the range of potential consequences associated with various risks that the company faces. For example, if a severe earthquake occurred while the company was filming a movie, there could be deaths and injuries, destruction of movie sets, delays in production, costs associated with filming at an alternative location, and loss of reputation and good will. The type of analysis performed by the risk manager is called - Correct answer Scenario analysis Northeast Urban Properties owns and operates office buildings in New York, Boston, and Philadelphia. The risk manager decided to examine the impact of potential terrorist attacks on each building. For example, for the Philadelphia building, the risk manager examined attacks at three levels: scare (e.g. suspicious package), minor explosion or gas attack, and large-scale attack. For each level, the risk manager listed the risk owners, the risk quadrants impacted, the likelihood of attack, the consequence, the risk level, and the risk control measures that needed to be implemented. This information was summarized in a one-page chart. The chart the risk manager prepared is a - Correct answer Risk register with scenario model A tool developed at the risk owner level that links specific activities, processes, projects, or plans to a list of identified risks and results of risk analysis and evaluation; and that is ultimately consolidated at the enterprise level is called a - Correct answer Risk register As a best practice, a risk register should be an interactive computer system. Which one of the following individuals should be responsible for continually updating risk information? - Correct answer Risk owner A risk management professional should ensure that an organizational risk register has which one of the following characteristics? - Correct answer Provides interactive use for risk owners Which one of the following types of risk analysis uses historical data to assign specific values to consequences and their probabilities to reach a numeric indication of the level of risk? - Correct answer Quantitative analysis Which one of the following describes the law of large numbers? - Correct answer It states that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes also increases Probability analysis is particularly effective for projecting losses in organizations that have - Correct answer A substantial volume of data on past losses and fairly stable operations A chart showing the probability of obtaining the numbers one through six on one roll of one die represents a - Correct answer Theoretical probability distribution The weighted average of all the possible outcomes of a theoretical probability distribution is the - Correct answer Expected value In Fred's large landscaping business, he knows that there is a point where equipment becomes unsafe and difficult to maintain. Fred realizes that after 2,000 miles of use, his costs for maintenance on his large mowers and sod busters dramatically rise. Using probability analysis Fred can better know - Correct answer When to replace equipment Widget Manufacturing Company has noticed that its loss frequency and severity has increased in the past two years as its production has increased. In order to better forecast loss frequency and severity, Widget Manufacturing Company should consider using - Correct answer Trend analysis An analysis that identifies mathematical patterns in past losses and then projects these patterns into the future is - Correct answer Trend analysis Decision tree analysis and event tree analysis are similar in a number of ways, but differ in their - Correct answer Purpose Which one of the following statements is true regarding event tree analysis? - Correct answer Event tree analysis typically provides only two options, success or failure Which one of the following statements about event tree analysis is true? - Correct answer Event trees analyze the consequences of accidental events Which one of the following is the initiating event in an event tree analysis? - Correct answer Lightning strikes a warehouse building while it is closed for the weekend A main difference between decision trees and event trees is - Correct answer hat event trees analyze the consequences of accidental events rather than decisions One way of jointly considering frequency and severity is to combine both frequency and severity distributions into - Correct answer A total claims distribution Data credibility refers to the level of confidence that - Correct answer Available data can accurately indicate future losses The management team of a company decided that it made more sense for the organization to concentrate on critical operations and to outsource noncritical operations. Outsourcing noncritical operations is a form of - Correct answer Risk transfer The most direct driving route between Bailey's home and the office where she works would require her to drive through a high-crime area. In the high-crime area, car jackings and drive-by shootings are common. Although it increases her travel time by 15 to 20 minutes in each direction, Bailey takes a longer route so that she does not have to drive through the high-crime area. Bailey is dealing with the risk of being injured while driving through the high-crime area through - Correct answer Avoidance The chief executive officer of GBB Company, in consultation with the head of the human resources department, decided to begin to offer off-site day care as an employee benefit for GBB employees. The risk manager learned of the day care operation two weeks after the service to employees had begun. He reviewed the company's liability insurance contracts and determined that the company had no coverage for liability arising out of the day care operations. This risk, as it was not identified and treated, is being handled through - Correct answer Unplanned retention Which one of the following is a pure risk? - Correct answer Being sued for $10,000 because of property damage Which one of the following is a speculative risk? - Correct answer The risk of a wager at a casino A conscious act or decision not to act that generates the funds to pay for losses or offset the variability in cash flows that may occur as an outcome of risk defines - Correct answer Risk financing Barney Farnsworth is unable to afford the proposed insurance premium to insure his hobby shop. Instead of purchasing insurance, Barney decides to set aside a specific amount of money which he will use in the event his property incurs losses. This risk management technique chosen by Barney is - Correct answer Funded retention One reason planned retention may be chosen as a risk management technique is because - Correct answer No other alternatives are available-Planned retention is a deliberate assumption of a loss exposure that has been identified and analyzed by the organization. It is used because it is cost-effective or because it is convenient or because no other alternatives are available. Liz Sellers owns a property that has below standard electrical wiring. Liz's insurer quoted a high premium to insure the property with current wiring and advised her that the premiums will be reduced once the property is upgraded to meet the current standards and building codes. Unable to afford the premiums, Liz has decided to forgo purchasing insurance at this time. Liz is setting aside some savings to address small losses. Liz has chosen which one of the following risk management techniques? - Correct answer Planned retention Tania works in the fraud unit for Greatview Insurance. There is a claimant who appears to be involved in multiple cases of insurance fraud. Tania decides to use social media to obtain information that may be used to develop a profile of the claimant. Tania's use of social media is an example of which one of the following types of data? - Correct answer Unstructured external Not defined and does not follow a specified format - Correct answer Unstructured data Which one of the following is a legal and regulatory concern in obtaining mass information from social media? - Correct answer Privacy A predictive approach to data analytics involves - Correct answer Providing a method to be used repeatedly to provide information. The descriptive approach is applied - Correct answer When an insurer or risk manager has a specific problem. Which one of the following is a way that insurers and risk managers can use data science to improve their results through data-driven decision making? - Correct answer Discovering new relationships in data Currently, insurers process which portion of their available structured data? - Correct answer A low percentage When training a predictive model, which one of the following is a reason for cross- validation to be used? - Correct answer A very limited amount of training data is available, and the model's developers think it unwise to not use some of the data for training because of the need for holdout data In the context of a predictive model, a true positive results when the model - Correct answer Correctly predicts a positive When examining a model's results, insurance and risk management professionals should defer to - Correct answer Their professional experience A data analysis technique that an insurer would likely use to analyze claims adjusters' notes is - Correct answer Text mining following components forms the basis for carrying out all of the organization's other functions? - Correct answer Control environment Which one of the following is a responsibility of internal auditors? - Correct answer To validate that internal controls are in place, functioning, and meeting design objectives Tar-Con Company went through a reorganization last year. After the reorganization, a new department appeared on the organizational chart. The new department reports directly to the board of directors rather than to a company official. When asked what the role of the new department was, the president of Tar-Con said, "They are charged with evaluating how well we are achieving our business objectives." Although the members of the department are employees of the company, they operate independently of company management. The new department Tar-Con Company created is - Correct answer Internal audit Many organizations are required to have an external auditor verify their financial statements. The external auditors also test financial reporting systems and internal controls to check that the systems are reporting transactions correctly. The approval of a company's financial statements by an external auditor is - Correct answer Report certification When Courtney was a member of the Information Services department at ABC Company, she designed an electronic system to track all of ABC's accounting transactions. She was recently promoted to internal auditor of ABC Company. An obvious problem with Courtney's new position with regard to reviewing the accounting system she designed is - Correct answer Independence A process in which managers perform an annual self-audit of the level of confidence they have in the risk management culture, practice, and procedures in their area is called - Correct answer A control risk self-assessment Reduced capital costs, more favorable business terms, and greater interdepartmental communication are all benefits of which one of the following? - Correct answer Risk assurance The level of confidence an organization places in the organization's risk management culture, practices, and procedures is called - Correct answer Risk assurance The board of directors of Insurance Company wants assurance that the company's recently-instituted "commitment to risk management" has been communicated to and accepted by all company employees. Which one of the following would be the best method to determine if employees had been informed of the commitment to risk management and had accepted it? - Correct answer Ask the internal audit department to administer a risk management questionnaire to employees Which one of the following statements about risk management monitoring and reporting is true? - Correct answer The most important characteristic of a risk report format is that it is useful to the user. At each board of directors meeting at XYZ Insurance Company, each vice president gives a report on his/her area. Darlene is the Vice President of Investments. During one portion of her presentation, she reviews whether the portfolio is in compliance with each of the company's investment guidelines (e.g. no more than 15% of the portfolio may be invested in equities, no more than 2% of the portfolio may be invested in securities issued by the same company, all bonds must be investment grade, etc.). The reporting format that Darlene uses for this portion of her presentation is called a - Correct answer Scorecard Which one of the following is an example of a report that would most likely contain both quantitative and qualitative data? - Correct answer A customer satisfaction survey Which one of the following statements is true regarding an effective risk reporting system? - Correct answer An effective reporting system provides efficient information flow up and down the lines of authority