Risk Management and Auditing Essentials

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Questions and Answers

What does the 'C' in COPE stand for in the context of property underwriting?

Construction (correct)

Cost

Compliance

Condition

Which hazard is characterized by carelessness or indifference leading to potential losses?

Environmental hazard

Moral hazard

Market hazard

Morale hazard (correct)

What does a combined ratio greater than 100 indicate for an insurance company?

Sustained growth

Break-even performance

Profit from underwriting

Loss from underwriting (correct)

How is public fire protection defined?

Governmental services available to all properties in an area Signup and view all the answers

Which of the following is NOT a component evaluated in nonfinancial measures for monitoring underwriting results?

Market share Signup and view all the answers

What is the purpose of a loss run report in underwriting?

To detail an insured's history of claims Signup and view all the answers

What does the retention ratio represent in insurance?

The percentage of policies renewed by an insurer Signup and view all the answers

Which aspect is evaluated by underwriters to analyze loss exposures from surrounding properties?

External exposure Signup and view all the answers

What does residual risk include?

Unidentified risks and retained risks Signup and view all the answers

Which analysis technique is used to evaluate a product's safety?

Fault Tree Analysis Signup and view all the answers

What characterizes tangible costs?

Costs that can be directly observed and measured Signup and view all the answers

What does deductive analysis involve?

A top-down approach deducing behavior from premises Signup and view all the answers

Which type of workers most commonly use dynamic risk assessments?

Emergency service workers Signup and view all the answers

What is the primary goal of risk management?

To minimize or eradicate adverse effects of risks Signup and view all the answers

Which statement accurately describes risk homeostasis?

People adjust their behavior based on perceived risk levels Signup and view all the answers

Which analysis leads with a bottom-up approach?

Failure Modes and Effects Analysis (FMEA) Signup and view all the answers

What does risk financing primarily rely on for its management?

Insurance and its professionals Signup and view all the answers

What is meant by 'frequency' in the context of analyzing losses?

The number of losses occurring in a defined period Signup and view all the answers

Which control type actively discourages individuals from violating security policies?

Deterrent Control Signup and view all the answers

What role does an underwriter play in personal umbrella policies?

Checks compliance with underlying coverage requirements Signup and view all the answers

Which of the following is an example of a recovery control?

Backups that restore systems post-failure Signup and view all the answers

What is a key characteristic of an umbrella policy?

It increases liability limits beyond existing policies Signup and view all the answers

What does societal risk estimate?

The likelihood of people being harmed by an industrial incident Signup and view all the answers

What is the primary purpose of physical controls in risk management?

To limit physical access to sensitive facilities Signup and view all the answers

What distinguishes pure risk from speculative risk?

Pure risk results in a loss or no loss, whereas speculative risk can result in profit or loss. Signup and view all the answers

Which of the following describes a corrective control?

Responds to security violations to mitigate impact Signup and view all the answers

What is the primary goal of safety and health programs?

To prevent workplace injuries, illnesses, and financial hardship Signup and view all the answers

What is the purpose of Fault Tree Analysis (FTA)?

To identify possible causes of a failure Signup and view all the answers

In failure analysis, what does common cause failure analysis identify?

Multiple failures resulting from one original cause Signup and view all the answers

What technique refers to the formal analysis of a system to determine hazards?

System hazard analysis Signup and view all the answers

What differentiates inductive analysis from deductive analysis?

Inductive analysis starts from known causes to find effects, while deductive analysis identifies causes from known effects. Signup and view all the answers

What ratio defines the failure rate?

The number of failures to the total number of attempts Signup and view all the answers

What is the primary concern for underwriters in umbrella and excess liability underwriting?

Loss severity Signup and view all the answers

What does facultative reinsurance allow a primary insurer to do?

Choose which loss exposures to submit for reinsurance Signup and view all the answers

How do underwriting guidelines benefit insurers?

They specify which accounts the insurer is willing to insure Signup and view all the answers

What is the purpose of telematics in insurance?

To transmit data and track behaviors through technology Signup and view all the answers

Catastrophe insurance primarily covers which type of events?

Low-probability, high-cost events Signup and view all the answers

What does the term 'retrocession' refer to in the context of reinsurance?

The portion of risk a reinsurer decides not to keep Signup and view all the answers

Which of the following is NOT one of the categories identified by the Human Factors Theory?

Miscommunication Signup and view all the answers

Why are premium audits conducted by insurers?

To verify policyholder operations and determine actual exposure units Signup and view all the answers

What does the term retrocession refer to in risk management?

The portion of risk the company chooses not to retain Signup and view all the answers

Which one of the following is a characteristic of the Fail Safe Passive system?

Equipment stops operating in a zero energy state Signup and view all the answers

What is the primary focus of safety and health programs in the workplace?

Reducing workplace injuries, illnesses, and deaths Signup and view all the answers

Which principle states that work expands to fill the time available for its completion?

Parkinson’s Principle Signup and view all the answers

In risk management, what does the probability measure?

The likelihood of an event occurring Signup and view all the answers

What does vicarious liability mean in a legal context?

Assigning liability to a person not directly responsible for an act Signup and view all the answers

Which risk analysis technique evaluates the impact of control measures added to a simple system?

Naked Man Technique Signup and view all the answers

Which statement best describes 'standard deviation' in statistics?

A measure of dispersion in a data set Signup and view all the answers

What does the Pareto Principle, sometimes referred to as the 80/20 Rule, imply?

80% of results come from 20% of efforts Signup and view all the answers

What is a hazard in the context of workplace safety?

A condition that could potentially cause harm Signup and view all the answers

Which of the following is NOT a control measure for risk management?

Ignoring safety protocols Signup and view all the answers

Which of the following is a recommended practice for risk communication?

Listening to public concerns Signup and view all the answers

What does a T-test compare in statistics?

Population mean to sample mean Signup and view all the answers

Study Notes

Risk-Based Auditing

Prioritizes use of limited internal audit resources in areas posing greatest risk to the organization
Emphasizes auditing to business objectives, focusing on materiality of risk, and identifying threats to business goals.

Risk Management and Organizational Alignment

Provides insurance and risk management solutions to control or contain losses and satisfy customers.
Common objectives include balancing risk and reward, supporting decision-making, achieving goals such as tolerable uncertainty, legal and regulatory compliance, survival, business continuity, earnings stability, profitability, growth, and social responsibility

Underwriting

Helps insurers develop and maintain a profitable book of business by minimizing adverse selection, ensuring adequate policyholder's surplus, and enforcing underwriting guidelines
Underwriters select insureds, classify accounts, price accounts, recommend coverage, manage a book of business, support producers, insureds and support marketing objectives

Staff Underwriters

Research the market, formulate underwriting policies, revise underwriting guidelines, evaluate loss experience, develop coverage forms, review rates, arrange reinsurance, assist with complex accounts, and conduct underwriting audits.

Underwriting Policy

Provides a guide to individual and aggregate policy selection that supports an insurer's mission statement

Essential Knowledge for Underwriters

Successful underwriters possess knowledge of insurance principles, practices, loss exposures and pricing, insurance rates, loss analysis and internal/external information sources

Rating

(Information omitted, page contains only rating header)

Rating (Page 2)

Involves applying an applicable rate and rating plan to an exposure, and performing necessary calculations to determine the policy premium.

Moral Hazard (Page 2)

A condition increasing the likelihood of intentional loss or exaggeration

Property Application (Page 2)

Underwriters examine crucial information, including loss history, COPE elements and property values.

Supplemental Information (Page 2)

Information like risk management programs, financial statements, risk control reports, and property valuation guides further assesses a property account's quality.

COPE and Loss Run (Page 2)

COPE elements include construction, occupancy, protection, and external exposures, analyzed by commercial property underwriters
Loss run: a report detailing an insured's claims history over a specific period

Morale Hazard (Page 2)

A condition of carelessness or indifference increasing the frequency or severity of loss

Fire Protection and Division (Page 2)

Underwriters analyze loss exposures posed by immediate neighboring properties or the surrounding area.
A fire division is a section of a structure protected to prevent fire spread to another section.

Public and Private Fire Protection (Page 2)

Public fire protection: equipment and services available from the government.
Private fire protection: measures taken by property owners to protect their assets.

Residential and Occupational Loss Exposures (Page 3)

Underwriters evaluate residential losses considering guest hazards.
Personal insurance applications contain questions about occupation or employment to determine potential loss frequency and severity.

Rating Plan (Page 3)

A set of directions specifying criteria for determining premiums for a particular line of insurance, based on exposure base, exposure unit, and rate per exposure unit.

Combined Ratio (Page 3)

A ratio of less than 100 indicates underwriting profit.
A ratio of more than 100 indicates underwriting loss.

Nonfinancial Measures (Page 3)

Used to monitor underwriting results including selection, pricing, product /line of business mix, retention ratio, hit ratio, and customer service.

Retention Ratio (Page 3)

The percentage of expiring policies an insurer renews.
Higher retention rates indicate profitability due to existing relationships.

Hit Ratio (Page 3)

Compares policies written with applications quoted to evaluate underwriter performance in meeting sales goals.

Physical Controls (Page 3)

(Information omitted, page contains only physical controls header)

Technical Controls (Page 4)

Logical controls in the computing environment, e.g. operating systems, application programs, database frameworks, and firewalls

Directive Control (Page 4)

Specifies expected employee behavior, often in the form of policies and guidelines, e.g., acceptable use policy.

Deterrent Control (Page 4)

Discourages individuals from violating policies due to the effort to circumvent them and the associated consequences, e.g., CCTV monitoring

Preventative Control (Page 4)

Stops a security incident, e.g., background screenings

Compensating Control (Page 4)

Implemented when the system can't provide all required policy protection; to reduce risk down to an acceptable level, e.g., an agreed exceptional process.

Detective Control (Page 4)

Alerts security professionals to attempted security violations

Corrective Control (Page 4)

Responds to security violations to reduce or eliminate impact, e.g., escorting unauthorized persons offsite

Hazard (Page 4)

A condition or activity with potential harm

Risk (Page 4)

Probability of injury, loss, or hazard

Incident (Page 4)

(Information omitted, Page contains only incident header)

Risk Response Strategies (Page 5)

Avoidance, Transfer, Retention, and Reduction

ALARA and ALARP (Page 5)

As Low As Reasonably Achievable
As Low As Reasonably Practical

Loss Control Measures (Page 5)

Examples include Hazcom training, machine guards, and confined space programs

Domino Theory (Page 5)

All accidents caused by a chain of events, removing any chain prevents accident.

Petersen's Accident/Incident Theory (Page 5)

Accident/incident causes due to human error and/or system failure.

Risk Analysis vs. Risk Management (Page 5)

Risk Analysis: estimates risk scientifically
Risk Management: determines whether risk is acceptable and establishes strategies for reduction.

Hazard Analysis Categories (Page 5)

Three categories (omitted, page contains header only)

Environmental Issues (Page 6)

Issues causing stress, hazards and failures.

Primary Methods for Reducing Accidents (Page 6)

Prevention (loss control)
Financial (cost reduction)

Objectives of Risk Management (Page 6)

Reducing anxiety before a loss.
Meeting corporate responsibility.
Continued growth after loss.

Poka-Yoke (Page 6)

Lean manufacturing technique preventing or detecting errors.
Mistake-proofing methods to ensure fail-safe systems minimizing human error.

Kaizen (Page 6)

Japanese term for continuous improvement.
5-S an effective housekeeping technique: Sort, Straighten, Scrub, Standardize.

Risk Management Techniques (Page 6)

Risk control: measures preventing or reducing losses
Risk financing: insurance to help pay for losses.

Risk Management (Page 6)

Feasibility assessment (omitted, page contains only risk management header)

Financial Considerations (Page 7)

Forecasted losses, insurance types, deductibles

Non-Financial Considerations (Page 7)

Business operations, customer and employee safety, and reputation

Risk Management Techniques Techniques (Page 7)

Risk financing methods implemented by risk management professionals
Risk control methods implemented by operations managers, requiring communication and training

Insurance (Page 7)

Rating plan: criteria for exposure base, exposure unit, and rate per exposure unit to determine premiums
Combined ratio: ratio of less than 100 indicates underwriting profit; ratio more than 100 indicates no underwriting profit
Non-financial measures to monitor underwriting results: selection, product/line of business mix, pricing, retention ratio, hit ratio, and customer service

Retention Ratio (Page 7)

Percentage of expiring policies an insurer renews

Underwriting (Page 7)

Details percentage of renewal policies compared to new business
Underwriting elements: limits of liability, deductibles, underlying insurance, loss severity

Reinsurance (Page 7)

Transferring risk to another insurer through contract
Facultative reinsurance: primary insurer submits loss exposures for individual review and acceptance by reinsurer.

Underwriting Guidelines (Page 7)

Written manual guiding policy decisions, specifying attributes of insurable accounts.

Qualitative and Quantitative Risk Assessment (Page 7)

Qualitative uses non-numeric values to estimate risk
Quantitative uses numerical data from historical events or instances of risk.
Including methods like Delphi Methods, Facilitated Risk Analysis Process (FRAP), and Operationally Critical Threat, Asset and Vulnerability Evaluation (OCTAVE)

(Remaining notes are too long to extract as bullet points and are best read as a whole, as many depend on preceding ones)

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Description

This quiz covers the fundamentals of risk-based auditing, risk management, and underwriting. It emphasizes the importance of prioritizing audit resources based on risk and aligning organizational objectives with risk management strategies. Test your knowledge on key principles and practices that ensure effective risk control and business continuity.