Risk Treatment and Mitigation Flashcards

If the trigger event on a catastrophe bond occurs, what typically happens?

Answer: Investors lose some or all of their interest and/or principal, and the funds pay the sponsor's losses

Cat bond investors take on the catastrophe risk, so their principal or interest goes to cover losses when the trigger occurs.

An airline buys jet fuel futures contracts to lock in future fuel costs. This is an example of:

Answer: Hedging

Hedging uses financial instruments to offset losses from adverse price movements.

A contingent capital arrangement gives an organization:

Answer: The right to issue securities or borrow at prearranged terms after a specified loss occurs

Contingent capital secures post-loss funding on terms agreed before the loss happens.

Which term describes the risk that remains after risk treatment has been applied?

Answer: Residual risk

Residual risk is whatever exposure remains after controls and financing measures are in place.

Which of the following is a post-loss risk management goal rather than a pre-loss goal?

Answer: Continuity of operations

Continuity of operations is about how the organization performs after a loss occurs.

Why is guaranteed cost insurance considered a pure risk transfer technique?

Answer: The premium is fixed and does not change based on the insured's actual losses during the policy period

With guaranteed cost coverage, the insurer bears the losses for a set premium that does not depend on the insured's loss experience.

In a business continuity plan, the recovery time objective (RTO) refers to:

Answer: The target time within which a critical function must be restored after a disruption

RTO is the maximum acceptable downtime before a critical process must be back up and running.