ARM Risk Treatment and Mitigation 2 — Questions and Answers
Question 1: A manufacturer keeps a full set of critical machine parts at an off-site warehouse that is used only if the primary stock is destroyed. Which risk control technique is this?
- Separation
- Duplication (Correct answer)
- Diversification
- Loss prevention
Correct answer: Duplication
Duplication relies on backups or spares that are not used in daily operations unless a loss occurs.
Question 2: A retailer splits its inventory evenly between two warehouses that both ship orders every day. Which risk control technique does this illustrate?
- Duplication
- Exposure avoidance
- Separation (Correct answer)
- Risk retention
Correct answer: Separation
Separation spreads assets or activities across locations that are all used in normal operations, which limits the loss from any one event.
Question 3: An automatic sprinkler system in a warehouse is mainly an example of which risk control technique?
- Loss reduction (Correct answer)
- Loss prevention
- Exposure avoidance
- Diversification
Correct answer: Loss reduction
Sprinklers do not stop fires from starting, but they reduce how severe a fire becomes.
Question 4: Which statement best describes a major limitation of exposure avoidance as a risk treatment?
- It always costs more than buying insurance
- It only reduces loss severity, not frequency
- It cannot be combined with any other technique
- It gives up the benefits of the avoided activity and may not be feasible for core operations (Correct answer)
Correct answer: It gives up the benefits of the avoided activity and may not be feasible for core operations
Avoidance removes the chance of loss entirely, but the organization also loses whatever the activity would have earned.
Question 5: Diversification as a risk control technique applies mainly to which type of risk?
- Pure property risks only
- Speculative business risks (Correct answer)
- Workers compensation exposures
- Fidelity exposures
Correct answer: Speculative business risks
Diversification spreads business risk across different products, markets, or customers, which mainly affects speculative risk.
Question 6: A tenant signs a lease agreeing to pay for the landlord's liability losses that arise from the tenant's use of the premises. This is best classified as:
- Contractual transfer for risk control
- Exposure avoidance
- Noninsurance risk transfer for risk financing (hold-harmless agreement) (Correct answer)
- Guaranteed cost insurance
Correct answer: Noninsurance risk transfer for risk financing (hold-harmless agreement)
A hold-harmless agreement moves the financial burden of a loss to another party without using insurance.
Question 7: Under the frequency-severity approach, which loss exposure is generally best suited to retention?
- High frequency, low severity (Correct answer)
- Low frequency, high severity
- High frequency, high severity
- Low frequency, catastrophic severity
Correct answer: High frequency, low severity
Frequent small losses are predictable and affordable, so retaining them is usually cheaper than insuring them.
