ARM 401 (ASSOCIATE IN RISK MANAGEMENT)
EXAMINATION COMPLETE QUESTIONS AND DETAILED
SOLUTIONS
LATEST UPDATE THIS YEAR JUST RELEASED
Question 1: Global Reinsurance Company (GRC) is a European
reinsurer that accepts risks from insurers around the world.
Financial managers at GRC would like to estimate profitability for
next year for their five primary risk areas: flood risk in Europe,
earthquake risk in Japan, hurricane risk for the Gulf Coast of the
United States, California earthquake risk, and typhoon risk in
Indian Ocean nations. The financial managers entered event
probabilities, loss payment estimates, retained loss levels,
premiums to be received, and other data into a computer. Then the
computer was programmed to select values for each variable and
based on the data, to calculate net income. The computer was
programmed to repeat the calculation 500,000 times. The output
from the analysis was a distribution showing the probability of
obtaining various profit levels. The procedure GRC used is called
Answer:
Computer simulation
Question 2: In a normal distribution, fewer than 5% of outcomes are
Answer:
Outside two standard deviations above or below the mean.
Question 3: Magruder Company would like to estimate the number
of workers compensation claims to expect next year. Magruder's
risk manager ran a regression analysis in which the number of
,workers compensation claims was the dependent variable and the
number of payroll hours worked (in thousands) was the
independent variable. The y-intercept from the regression was 3.8.
The slope coefficient was 1.4. The risk manager believes that next
year Magruder workers will work 80,000 payroll hours. Based on
this information, approximately how many workers compensation
claims should the risk manager expect next year?
Answer:
116 (y = mx + b, payroll is the independent x axis and claims is the dependent
y axis. y = 1.4 (80) + 3.8 = 115.8, rounded to 116 claims next year)
Question 4: A main difference between decision trees and event
trees is
Answer:
That event trees analyze the consequences of accidental events rather than
decisions
Question 5: The theoretical probability of a head on a coin toss is
50%. Based on the law of large numbers, which one of the following
is the number of coin tosses most likely to result in an empirical
frequency of 50% receiving a head on a coin toss?
Answer:
100 (As the number of samples increase, the empirical frequency of a head on
a coin toss will move closer and closer to 50%. Of the choices provided, the
number of coin tosses most likely to result in an empirical frequency of 50%
receiving a head on a coin toss is 100.)
Question 6: Which one of the following statements is true if
earnings at risk are $200,000 with 90% confidence?
,Answer:
Earnings at risk are projected to be less than $200,000 10% of the time.
Question 7: If 95.44% of all outcomes are within two standard
deviations above and below the mean and 2.15% of all outcomes
are between two and three standard deviations above and 2.15% of
all outcomes are between two and three standard below the mean,
the percentage of all outcomes that lie beyond three standard
deviations from (above and below) the mean is
Answer:
26 (100% - 95.44% - 2.15% - 2.15% =.26%; .26% of all outcomes lie outside
three standard deviations above and below the mean.)
Question 8: Which one of the following is considered the most
effective loss control method against potential losses from
computer hackers?
Answer:
Computer passwords
Question 9: Mike is the new risk manager for ABC Web Hosting,
LLC. ABC develops and hosts Web sites for many different
organizations. Mike took over the risk manager position from Tom,
who was let go for poor performance. XYZ Retailer was one
customer for whom ABC built a Web site. Recently, XYZ Retailer
accused ABC of not building a secure site. As a result of the site
not being secure, XYZ Retailer claims that its sales have decreased
dramatically. XYZ also contends that the personal information of
many of its customers was compromised and, now, XYZ is being
sued by a group of its customers for not doing a better job of
protecting their personal information. Now XYZ Retailer is suing
, ABC Web Hosting, LLC. Two noninsurance risk transfer methods
ABC could have used as a means of risk financing are
Answer:
. A hold-harmless agreement and a liability disclaimer
Question 10: Third parties in a cyber insurance transaction are
typically
Answer:
Customers of the first party.
Question 11: As part of its assessment of its cyber risk, an
organization should consider whether there are any intangible
property exposures. Which one of the following would best be
classified as an intangible property loss?
Answer:
The computer system is hacked and data including credit card numbers are
stolen.
Question 12: Directors and officers of a corporation have fiduciary
duties, which include the duty of being
Answer:
loyal
Question 13: ABC is a small, regional brewery that has recently
revised its entire operation following a devastating fire at its plant.
In restoring the plant to its full operating capacity, ABC's
management installed a computer-control system that centralizes
and automates many of the business and manufacturing functions
EXAMINATION COMPLETE QUESTIONS AND DETAILED
SOLUTIONS
LATEST UPDATE THIS YEAR JUST RELEASED
Question 1: Global Reinsurance Company (GRC) is a European
reinsurer that accepts risks from insurers around the world.
Financial managers at GRC would like to estimate profitability for
next year for their five primary risk areas: flood risk in Europe,
earthquake risk in Japan, hurricane risk for the Gulf Coast of the
United States, California earthquake risk, and typhoon risk in
Indian Ocean nations. The financial managers entered event
probabilities, loss payment estimates, retained loss levels,
premiums to be received, and other data into a computer. Then the
computer was programmed to select values for each variable and
based on the data, to calculate net income. The computer was
programmed to repeat the calculation 500,000 times. The output
from the analysis was a distribution showing the probability of
obtaining various profit levels. The procedure GRC used is called
Answer:
Computer simulation
Question 2: In a normal distribution, fewer than 5% of outcomes are
Answer:
Outside two standard deviations above or below the mean.
Question 3: Magruder Company would like to estimate the number
of workers compensation claims to expect next year. Magruder's
risk manager ran a regression analysis in which the number of
,workers compensation claims was the dependent variable and the
number of payroll hours worked (in thousands) was the
independent variable. The y-intercept from the regression was 3.8.
The slope coefficient was 1.4. The risk manager believes that next
year Magruder workers will work 80,000 payroll hours. Based on
this information, approximately how many workers compensation
claims should the risk manager expect next year?
Answer:
116 (y = mx + b, payroll is the independent x axis and claims is the dependent
y axis. y = 1.4 (80) + 3.8 = 115.8, rounded to 116 claims next year)
Question 4: A main difference between decision trees and event
trees is
Answer:
That event trees analyze the consequences of accidental events rather than
decisions
Question 5: The theoretical probability of a head on a coin toss is
50%. Based on the law of large numbers, which one of the following
is the number of coin tosses most likely to result in an empirical
frequency of 50% receiving a head on a coin toss?
Answer:
100 (As the number of samples increase, the empirical frequency of a head on
a coin toss will move closer and closer to 50%. Of the choices provided, the
number of coin tosses most likely to result in an empirical frequency of 50%
receiving a head on a coin toss is 100.)
Question 6: Which one of the following statements is true if
earnings at risk are $200,000 with 90% confidence?
,Answer:
Earnings at risk are projected to be less than $200,000 10% of the time.
Question 7: If 95.44% of all outcomes are within two standard
deviations above and below the mean and 2.15% of all outcomes
are between two and three standard deviations above and 2.15% of
all outcomes are between two and three standard below the mean,
the percentage of all outcomes that lie beyond three standard
deviations from (above and below) the mean is
Answer:
26 (100% - 95.44% - 2.15% - 2.15% =.26%; .26% of all outcomes lie outside
three standard deviations above and below the mean.)
Question 8: Which one of the following is considered the most
effective loss control method against potential losses from
computer hackers?
Answer:
Computer passwords
Question 9: Mike is the new risk manager for ABC Web Hosting,
LLC. ABC develops and hosts Web sites for many different
organizations. Mike took over the risk manager position from Tom,
who was let go for poor performance. XYZ Retailer was one
customer for whom ABC built a Web site. Recently, XYZ Retailer
accused ABC of not building a secure site. As a result of the site
not being secure, XYZ Retailer claims that its sales have decreased
dramatically. XYZ also contends that the personal information of
many of its customers was compromised and, now, XYZ is being
sued by a group of its customers for not doing a better job of
protecting their personal information. Now XYZ Retailer is suing
, ABC Web Hosting, LLC. Two noninsurance risk transfer methods
ABC could have used as a means of risk financing are
Answer:
. A hold-harmless agreement and a liability disclaimer
Question 10: Third parties in a cyber insurance transaction are
typically
Answer:
Customers of the first party.
Question 11: As part of its assessment of its cyber risk, an
organization should consider whether there are any intangible
property exposures. Which one of the following would best be
classified as an intangible property loss?
Answer:
The computer system is hacked and data including credit card numbers are
stolen.
Question 12: Directors and officers of a corporation have fiduciary
duties, which include the duty of being
Answer:
loyal
Question 13: ABC is a small, regional brewery that has recently
revised its entire operation following a devastating fire at its plant.
In restoring the plant to its full operating capacity, ABC's
management installed a computer-control system that centralizes
and automates many of the business and manufacturing functions
