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Certified Risk Manager Principles Exam
Define Risk (4 definitions) - ANSWER - 1. Risk is chance or probability of loss
- Risk is uncertainty concerning loss
- Risk is the difference between expected losses and actual losses
- A possibility of variation of outcomes from a given set of circumstances Define Pure Risk - ANSWER - there is only a chance for loss or no loss Define Speculative Risk - ANSWER - There is a chance of loss, no loss, as well as a chance of gain Define an exposure - ANSWER - A situation, practice or condition that may lead to an adverse financial consequence
Define a hazard - ANSWER - a condition or circumstance that may give rise to a loss from a given peril Define a peril, and give an example of one - ANSWER - the cause of a loss, ex: fire, wind, hail, slip and fall Define an incident - ANSWER - An unplanned event that disrupts normal activities and may become a loss, claim, or business interruption Define an accident - ANSWER - An unplanned event definite as to time and place that results in injury or damage to person or property Define an occurrence - ANSWER - an accident with the limitation of time removed; an accident that is extended over a period of time rather than a single observable happening Define a claim - ANSWER - a demand or obligation for payment as a result of a loss
3.Raises awareness of the importance of Risk management
- Supports managerial objectives
- Improves morale and objectivity
- Improves quality processes and technology Define Traditional Risk Management (TRM) and Enterprise Risk Management (ERM) - ANSWER - TRM - functional, siloed view of risks affecting one or more areas of an organization, focuses on pure risk ERM - cross functional view of risks affecting all areas of an organization, ERM embraces speculative risk Describe the characteristics of Traditional Risk Management (TRM) - ANSWER - 1. Manages downside risks only
- siloed treatment of risk
- risk identification and ownership is the risk manager's job
- reactive
- focus on minimizing risk impact
- oriented towards cause of loss
Describe the characteristics of Enterprise Risk Management (ERM) - ANSWER - 1. Risk affects both the upside and the downside
- tied to key business objectives
- cross-functional treatment of risk across the whole organization
- uses subject matter experts and risk committees to identify organizational risk
- spreads accountability to risk owners
- trains all stakeholders to be responsible for risk List the ERM Broad Categories of Risk and give examples of each
- ANSWER - Operational - supply chain, quality control Strategic- customer demand, competitive pressure Financial - currency exchange, credit Hazard - natural events, litigation Define Organizational Risk Culture (ORC) - ANSWER - Organizational Risk culture - a set of understandings, values,
- safeguards the firm's branding and reputation Identify the requirements of ERM implementation - ANSWER - 1. Support of the senior management team
- implementation leader and dedicated cross functional committees
- an ERM assessment
- common language regarding risk
- an established framework Explain the purpose of ISO 31000 - ANSWER - Internationally recognized standard that any organization can use to manage any risk category (operational, strategic, financial, hazard). Describes the risk management process in a detail and systematic way, and established principles which must be satisfied to implement an effective risk management function Components of ISO 31000 - ANSWER - 1. Scope
- Terms and definition
- Principles
- Framework
- Process Identify the 5 interrelated components of COSO - ANSWER - 1. Governance and culture
- Strategy and Objective setting
- Performance
- Reward and revision
- information, communication, and reporting Identify Obstacles to ERM implementation - ANSWER - 1. Lack of support from senior management
- difficult to invest capital in risk management program
- showing return on investments
- risk is viewed negatively in many organizations, so expanding to include upside risks may be difficult
- perception of risk vs. reality Define Risk appetite and Risk Ability, and their importance to an ERM program - ANSWER - Risk appetite - the organization's willingness to tolerate risk
- Juridical risk - risk arising from a jury or judge's decision, ex: class action law suits
- Social risk - damange from public relations, loss of reputations, damage to brand, etc., ex: company CEO is exposed for illegal Big Game Hunting
- Technological risk - risks arising from growing dependence upon and use of technology, as well as those created by emerging tech ex: ransomware denial of service attacks Describe the Governing Documents of a risk management program - ANSWER - Risk Management mission statement - states the overall goal of the risk management program, and guides the actions of the risk manager Risk management policy statement - defines the policy for managing risks and how it relates to the firm's goals and objectives, clarifies goals and direction
Risk management manual - demonstrates upper managements support for the risk program to all employees, establishes levels of performance and cooperation, familiarizes personnel with risk management procedures and exposures, provides a how to guide for job safety and reporting incidents and accidents Describe how to implement an effective risk management program - ANSWER - 1. Provide frequent communication about risk management through the organization and with third-party service providers
- communicate frequently with the risk management team, so the team understands the goals and objectives of the risk management function Continually reinforce the organization's commitment to risk management principles
- Involve all levels of the organization for successful implementation
- actively engage managers and supervisors
- involve all other employees in risk and loss control measures Why is risk identification the most important step in the Risk management process? - ANSWER - To effectively manage and
Requirements of an enforceable contract:
- Competent parties
- Agreement
- Legal consideration
- Legal purpose Describe the 4 remedies of an enforceable contract - ANSWER -
- damages - punitive, compensatory, or liquidated
- reformation - change the contract to reflect true intentions
- injunction
- performance - enforced compliance with promises Identify the purpose and characteristics of checklists - ANSWER
- Purpose - to systematically identify as many exposures, perils, and hazards as possible using a list
- standardized
- can be used by non-risk management personnel with minimal training
- cannot cover all areas or operations
- may not identify new exposures or emerging risks
- does not reflect severity of exposures Identify the purpose and characteristics of flowcharts - ANSWER
- Purpose - graphically and sequentially depict the activities of a particular operation or process to identify exposures, perils, and hazards
- illustrates interdependency within a firm
- pinpoints bottlenecks or chokepoints
- does not indicate frequency or severity
- does not show minor processes with major loss potential
- limited applicability to liability exposures Identify the purpose and characteristics of physical inspection - ANSWER - Purpose - to determine observable exposures, perils, and hazards by visits to a firm's sites and contingent locations
- provides visualization of processes, location, personnel, etc
- may find unreported hazards or assets
Explain the characteristics of credible loss data - ANSWER - 1. completeness - all events are included, whether covered by insurance or not
- consistency - same types available for each loss, same time frame, same recording methodology, same definitions, etc.
- integrity - reliability of data and accuracy of input, prompt reporting, current data
- Relevance - only uses data relevant to the analysis List the changes in exposures that may have an impact on loss data and analysis - ANSWER - 1. introduction of new products, services, equipment, work processes
- acquisitions, restructuring, mergers, divestitures
- legal and regulatory matters
- labor and management issues
- demographic changes Explain why loss data must be collected and analyzed - ANSWER
- Identify the causes of loss frequency and severity
- identify trends in loss experience and forecast losses
- compare to benchmarks
- establish a basis for allocating the total cost of risk
- assist with cost-benefit analysis of loss control initiatives Define accounting and Finance - ANSWER - Accounting - process of recording and classifying of business and financial transactions and reporting them on an organizations financial statements Finance - process of managing an organization's assets, liabilities, and cash flows to maximize shareholder wealth Identify the types of accounting systems a risk managers might encounter - ANSWER - GAAP - generally accepted accounting principles STAT/SAP/RAP - statutory accounting Tax accounting under IRS guidelines Governmental or fund accounting Managerial accounting
where a loss could occur, expenses that continue if a loss occurs, expenses that are controllable Describe the purpose and components of the Income Statement - ANSWER - Purpose - shows a summary of an organization's financial performance for a specific time Components:
- Revenue/sales
- Expenses
- Cost of goods sold
- Depreciation/amortization
- Interest expense
- Taxes
- Net income
- Profitability measures Describe the Purpose and components of the Balance Sheet - ANSWER - Purpose - gives a summary of the organization's assets, liabilities, and owner's equity at a specific point in time
Components:
- Current assets - cash, inventory, AR
- Fixed assets - PPE
- Current liabilities - accounts payable, accruals, short term notes
- Long term liabilities
- stockholder's equity Describe the purpose and components of the Statement of Cash Flows - ANSWER - Purpose - a report summarizing the effects of cash on the operating, investing, and financial activities of an organization for a specific time Components:
- Operating activities - sales, interest revenue, interest expense
- Investing activities - collections of sales or loans, sale of investments, sale of PPE, cash paid for loans and payments
- Financing activiites - cash received from issuing equity investments, sales of bonds, mortgages, notes, purchase of treasury stock
