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ARM (The Institutes Insurance Designations) practice questions

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Question 1Mastering Risk Management Techniques (ARM 400)

Which activity in the risk management process comes before risk measurement and risk treatment?

  1. Setting premiums
  2. Paying claims
  3. Identifying risks Correct answer.
  4. Buying insurance

Explanation

Risk identification establishes the exposures the organization faces; measurement, treatment, and financing follow once exposures are known. Insurance purchasing and claim payment are later financing or administrative activities.

Question 2Mastering Risk Management Techniques (ARM 400)

Which risk treatment technique leaves the financial consequence of a loss with the organization rather than transferring it to an insurer?

  1. Transfer
  2. Reduction
  3. Avoidance
  4. Retention Correct answer.

Explanation

Retention means the organization keeps some or all of a loss exposure and funds it itself. Transfer shifts the financial consequence to another party, such as an insurer.

Question 3Mastering Risk Management Techniques (ARM 400)

What is the main effect of a deductible in a property insurance policy?

  1. To guarantee policy renewal every year
  2. To remove policy exclusions
  3. To raise the policy limit
  4. To share loss with the insured Correct answer.

Explanation

A deductible is the amount the insured must absorb before the insurer pays a covered loss. It creates cost sharing within the policy limit rather than changing exclusions or renewal rights.

Question 4Mastering Risk Management Techniques (ARM 400)

A risk heat map typically displays each risk according to which two dimensions?

  1. Premium and commission
  2. Likelihood and impact Correct answer.
  3. Frequency and retention
  4. Audit and compliance

Explanation

A heat map plots risks by probability or likelihood against severity or impact so decision makers can see which exposures deserve priority. The other pairs do not form the standard two-axis risk map.

Question 5Mastering Risk Management Techniques (ARM 400)

What is the main purpose of a risk register?

  1. To record only insured losses
  2. To list employee salaries
  3. To track risks and treatments Correct answer.
  4. To replace financial statements

Explanation

A risk register is a structured record of identified risks, owners, assessments, and chosen treatments. It supports monitoring and follow-up rather than serving as a payroll list or financial statement substitute.

Question 6Mastering Risk Management Techniques (ARM 400)

Which risk control measure is designed mainly to reduce the frequency of workplace injuries?

  1. Safety training Correct answer.
  2. Purchasing a bond
  3. Accepting a deductible
  4. Using a captive

Explanation

Safety training changes worker behavior and exposure conditions, which can lower how often injuries occur. Bonds, captives, and deductibles are financing or retention arrangements rather than direct loss-frequency controls.

Question 7Mastering Risk Management Techniques (ARM 400)

A business continuity plan is primarily intended to address which type of event?

  1. Quarterly tax filings
  2. Routine price changes
  3. Recurring employee hiring cycles
  4. Major operational disruptions Correct answer.

Explanation

Business continuity planning prepares an organization to maintain or restore critical operations after a significant disruption. Routine market shifts, hiring, and tax filings are normally handled through ordinary management processes.

Question 8Mastering Risk Management Techniques (ARM 400)

Which exposure is best classified as a pure risk?

  1. Fire damage to a warehouse Correct answer.
  2. Loss on a stock investment
  3. Profit from a new product
  4. Gain from currency moves

Explanation

A pure risk involves only the possibility of loss or no loss, with no chance of gain. Investment losses, product profits, and currency gains are speculative because they can produce either favorable or unfavorable outcomes.

Question 9Mastering Risk Management Techniques (ARM 400)

A fleet has 200 vehicles. Historically, 10 vehicles collide each year, and the average repair cost is $4,000. What is the expected annual collision loss?

  1. $20,000
  2. $40,000 Correct answer.
  3. $80,000
  4. $4,000

Explanation

Expected loss equals expected number of losses multiplied by average severity: 10 collisions × $4,000 = $40,000 per year. This combines frequency and severity into a long-run average cost.

Question 10Mastering Risk Management Techniques (ARM 400)

Installing an automatic sprinkler system in a warehouse is best classified as which technique?

  1. Risk transfer
  2. Risk avoidance
  3. Loss reduction Correct answer.
  4. Risk retention

Explanation

Sprinklers reduce the severity of fire losses, which is a loss-control or loss-reduction measure. They do not transfer the financial consequence or eliminate the fire exposure.

Question 11Mastering Risk Management Techniques (ARM 400)

Which technique develops risk estimates by collecting anonymous expert opinions over several rounds until consensus emerges?

  1. Delphi technique Correct answer.
  2. Regression analysis
  3. Flowcharting
  4. Fault tree analysis

Explanation

The Delphi technique uses repeated anonymous questionnaires so experts can revise views without social pressure and move toward consensus. Flowcharts and fault trees map processes or causes, while regression is a statistical modeling method.

Question 12Mastering Risk Management Techniques (ARM 400)

A risk manager compares the cost of a new safety program with the expected reduction in future losses. Which analysis is being performed?

  1. Claims triage
  2. Premium audit reconciliation
  3. Subrogation review
  4. Cost-benefit analysis Correct answer.

Explanation

Cost-benefit analysis compares the cost of a risk control measure with the expected reduction in losses or other benefits. It helps determine whether a treatment is economically justified.

Question 13Mastering Risk Management Techniques (ARM 400)

A property policy has a $1,000,000 limit and a $10,000 deductible. A covered $300,000 loss occurs. Ignoring coinsurance, how much will the insurer pay?

  1. $300,000
  2. $10,000
  3. $1,000,000
  4. $290,000 Correct answer.

Explanation

The insurer pays the covered loss minus the deductible, subject to the limit: $300,000 - $10,000 = $290,000. The insured retains the first $10,000 of the loss.

Question 14Mastering Risk Management Techniques (ARM 400)

A property valued at $1,000,000 is insured for $720,000 under a policy with a 90% coinsurance requirement. A $100,000 covered loss occurs, and there is no deductible. What amount does the insurer pay?

  1. $72,000
  2. $80,000 Correct answer.
  3. $90,000
  4. $100,000

Explanation

The required amount of insurance is 90% × $1,000,000 = $900,000. The payment is the ratio actually carried to required insurance times the loss: ($720,000 / $900,000) × $100,000 = $80,000.

Question 15Mastering Risk Management Techniques (ARM 400)

Which risk financing arrangement involves a subsidiary created by a parent organization to insure the parent's exposures?

  1. Captive insurer Correct answer.
  2. Hold-harmless clause
  3. Retrospective rating
  4. Surety bond

Explanation

A captive insurer is a subsidiary formed to finance or insure the risks of its parent and affiliates. A hold-harmless clause is contractual transfer, a surety bond guarantees performance, and retrospective rating adjusts premium after the policy period.

Question 16Mastering Risk Management Techniques (ARM 400)

A fault tree analysis is used primarily to do which of the following?

  1. Audit financial controls
  2. Forecast claim reserves
  3. Map causes of a failure Correct answer.
  4. Set casualty insurance premiums

Explanation

Fault tree analysis starts with an undesired top event and traces the combinations of causes that could produce it. It is a causal analysis tool rather than a reserving, pricing, or financial audit method.

Question 17Mastering Risk Management Techniques (ARM 400)

A key risk indicator is most useful when it does which of the following?

  1. Records past insurance claims
  2. Calculates tax liabilities
  3. Lists policy exclusions
  4. Signals rising risk exposure Correct answer.

Explanation

A key risk indicator is a forward-looking metric that provides early warning of increasing exposure or deteriorating controls. A claims record is a lagging result, not a leading indicator.

Question 18Mastering Risk Management Techniques (ARM 400)

Which contract clause requires one party to reimburse another for losses caused by the first party's negligence?

  1. Indemnity clause Correct answer.
  2. Subrogation clause
  3. Abandonment clause
  4. Coinsurance clause

Explanation

An indemnity clause, often paired with a hold-harmless agreement, allocates responsibility for specified losses from one party to another. Subrogation concerns an insurer's recovery rights, while coinsurance and abandonment clauses address property coverage terms.

Question 19Mastering Risk Management Techniques (ARM 400)

Which group of costs is normally included in an organization's total cost of risk?

  1. Insurance commissions and fees
  2. Only direct claim payments
  3. Risk control and admin costs Correct answer.
  4. Only borrowed funds

Explanation

Total cost of risk includes premiums, retained losses, risk control expenses, administration, and claims-handling costs. Looking at only one component understates the full economic burden of risk.

Question 20Mastering Risk Management Techniques (ARM 400)

An organization has many similar, independent delivery vehicles. Which basis provides the most reliable estimate of its expected annual collision losses?

  1. One expert's opinion
  2. A legal contract review
  3. A single hypothetical worst-case event
  4. Historical frequency data Correct answer.

Explanation

A large number of similar, independent exposure units makes historical frequency and severity data relatively credible for estimating expected losses. A single event or one opinion provides much less statistical support.

Question 21Mastering Risk Management Techniques (ARM 400)

An organization states that it will pursue growth but will accept only a moderate amount of risk from new products. This statement best describes the organization's:

  1. Risk avoidance
  2. Risk appetite Correct answer.
  3. Risk tolerance
  4. Risk transfer

Explanation

Risk appetite is the broad amount and type of risk an organization is willing to accept in pursuit of its objectives. Risk tolerance is narrower and often expressed as acceptable deviation or specific limits around that appetite.

Question 22Mastering Risk Management Techniques (ARM 400)

Which measure estimates the maximum loss that will not be exceeded with a specified probability over a defined time horizon?

  1. Loss severity
  2. Long-run expected loss
  3. Loss frequency
  4. Value at risk Correct answer.

Explanation

Value at risk is a probability-based threshold: it estimates the loss amount that should not be exceeded at a chosen confidence level over a stated horizon. Expected loss is an average, while frequency and severity describe components of loss.

Question 23Mastering Risk Management Techniques (ARM 400)

In enterprise risk management, a risk that is modest alone but significant when combined with other exposures is best managed by:

  1. Single policy deductible
  2. Claims audit sampling
  3. Premium financing
  4. Risk aggregation Correct answer.

Explanation

Risk aggregation takes a portfolio view so that correlations and combined effects across exposures are visible. Managing each risk only in isolation can miss a concentration that is significant at the enterprise level.

Question 24Mastering Risk Management Techniques (ARM 400)

A business continuity objective states that order entry must be restored within four hours of a disruption. This is an example of a:

  1. Maximum probable loss
  2. Recovery time objective Correct answer.
  3. Risk retention limit
  4. Recovery point objective metric

Explanation

A recovery time objective sets the target time within which a process or function must be restored after disruption. A recovery point objective instead addresses how much data loss or rollback is acceptable.

Question 25Mastering Risk Management Techniques (ARM 400)

Which circumstance most strongly favors retaining a risk rather than transferring it?

  1. Unknown exposure with severe potential
  2. Low frequency and catastrophic severity
  3. Legal requirement to insure
  4. High frequency and low severity Correct answer.

Explanation

High-frequency, low-severity losses are often predictable and can be funded internally at lower cost than transferring them. Catastrophic, unknown, or legally required exposures are generally better transferred or avoided.

Question 26Mastering Risk Management Techniques (ARM 400)

Which activity is the first step in a formal risk management process?

  1. Purchasing insurance policies to cover the organization's known property exposures
  2. Calculating the organization's total cost of risk for the prior year
  3. Identifying and analyzing the organization's loss exposures Correct answer.
  4. Selecting a third-party administrator for liability claims

Explanation

Risk management begins with identifying and analyzing exposures before any treatment or financing decision is made. Only after exposures are understood can an organization select control measures, retention levels, or insurance.

Question 27Mastering Risk Management Techniques (ARM 400)

Which situation is an example of a speculative risk?

  1. A warehouse roof collapses under the weight of heavy snow
  2. A delivery driver injures a pedestrian at a crosswalk
  3. A company invests in a new product line Correct answer.
  4. A fire damages a production line overnight

Explanation

Speculative risks involve the chance of gain as well as loss, such as a business investment or new product launch. Pure risks involve only the chance of loss or no loss.

Question 28Mastering Risk Management Techniques (ARM 400)

An organization pays a premium to an insurer to cover its workers compensation losses. This action is best classified as:

  1. Risk avoidance
  2. Loss prevention
  3. Loss reduction
  4. Risk transfer Correct answer.

Explanation

Paying an insurer to assume the financial consequences of covered losses is risk transfer. Loss prevention and loss reduction are risk control techniques that address frequency or severity rather than financing the loss.

Question 29Mastering Risk Management Techniques (ARM 400)

A manufacturer stops selling a chemical product because the potential liability cannot be controlled. This risk treatment is:

  1. Transfer
  2. Retention
  3. Avoidance Correct answer.
  4. Reduction

Explanation

Avoidance eliminates the exposure by ceasing the activity that creates it. Retaining, transferring, or reducing the risk would leave the product-related exposure in place to some degree.

Question 30Mastering Risk Management Techniques (ARM 400)

In an enterprise risk management program, a risk owner is best described as the person who:

  1. Is accountable for managing a specific risk Correct answer.
  2. Sells insurance products to the organization
  3. Approves the annual budget for all departments
  4. Audits the organization's financial statements each year

Explanation

A risk owner is assigned accountability for a defined risk, including monitoring it and ensuring that an appropriate response is carried out. This ownership makes risk management responsibilities explicit.

Question 31Mastering Risk Management Techniques (ARM 400)

A risk manager defines risk capacity as the:

  1. Total insurance limit purchased for a major property location
  2. Maximum risk the organization can bear before failure Correct answer.
  3. Level of risk at which the board becomes uncomfortable
  4. Amount of risk the organization prefers to take in a given year

Explanation

Risk capacity is the maximum amount of risk an organization can bear before it threatens its viability or ability to meet objectives. Risk appetite is the amount it is willing to accept, and risk tolerance sets operating boundaries.

Question 32Mastering Risk Management Techniques (ARM 400)

To reduce the chance that a single fire will destroy all of its critical inventory, a company stores goods in three separate warehouses. This technique is:

  1. Separation Correct answer.
  2. Duplication
  3. Transfer
  4. Avoidance

Explanation

Separation disperses a single exposure across multiple locations so that one event cannot destroy everything at once. Duplication would involve creating backup copies or spare capacity, not dividing the original inventory.

Question 33Mastering Risk Management Techniques (ARM 400)

A company sets aside $2 million in a segregated reserve to pay future liability claims that fall within its self-insured retention. This arrangement is:

  1. Funded retention Correct answer.
  2. Insurance transfer
  3. Unfunded retention
  4. Contractual transfer

Explanation

Funded retention occurs when an organization deliberately sets aside assets or reserves to pay retained losses. Unfunded retention relies on current cash flow when losses occur.

Question 34Mastering Risk Management Techniques (ARM 400)

Which statement best distinguishes a deductible from a self-insured retention (SIR)?

  1. A deductible is paid after the policy limit is exhausted, while an SIR is paid before coverage begins.
  2. The insurer handles the claim above a deductible; the insured often manages the SIR layer. Correct answer.
  3. A deductible removes the insurer's duty to defend, while an SIR always preserves that duty.
  4. A deductible applies only to liability losses, while an SIR applies only to property losses.

Explanation

With a deductible, the insurer typically pays and handles the covered claim, then collects the deductible from the insured. With an SIR, the insured generally funds and often administers losses within the retention before the insurer responds.

Question 35Mastering Risk Management Techniques (ARM 400)

Under a retrospectively rated insurance policy, the final premium is:

  1. Fixed at policy inception and never adjusted
  2. Determined by the number of employees at each location
  3. Adjusted after the period based on actual losses Correct answer.
  4. Based solely on the insurer's investment income

Explanation

Retrospective rating adjusts the premium after the policy period to reflect the insured's actual loss experience, subject to minimum and maximum premiums. It links part of the insurance cost directly to losses incurred.

Question 36Mastering Risk Management Techniques (ARM 400)

An organization's experience modification factor decreases from 1.10 to 0.90. What does this change most likely indicate?

  1. The organization's payroll has fallen sharply.
  2. The organization has increased its deductible by 20 percent.
  3. The insurer has raised the policy limit by 20 percent.
  4. Its loss experience has improved relative to its class. Correct answer.

Explanation

An experience modification factor compares an insured's loss experience with the average for its classification. A factor below 1.00 generally reflects better-than-average experience and reduces the premium, while a factor above 1.00 increases it.

Question 37Mastering Risk Management Techniques (ARM 400)

A claims-made liability policy generally covers a claim when the:

  1. Injury or damage occurs during the policy period, regardless of when reported
  2. Policy is issued, regardless of when the injury occurs
  3. Insured first learns of the injury, even if years before the policy period
  4. Claim is first made and reported during the policy period Correct answer.

Explanation

Claims-made coverage is triggered by the making or reporting of a claim during the policy period, often subject to a retroactive date. Occurrence coverage, by contrast, is triggered by the date of injury or damage.

Question 38Mastering Risk Management Techniques (ARM 400)

A waiver of subrogation provision in a contract means that the:

  1. Insurer waives recovery of a paid loss from the other party Correct answer.
  2. Insured must repay the insurer for all claims paid
  3. Insurer may recover a paid loss from any party responsible for it
  4. Contractor must purchase a surety bond for the project

Explanation

Subrogation is the insurer's right to pursue responsible parties after paying a claim. A waiver of subrogation gives up that recovery right against the specified party, often because the parties have agreed to allocate risk in advance.

Question 39Mastering Risk Management Techniques (ARM 400)

Which statement best explains how a surety bond differs from an insurance policy?

  1. A surety bond is purchased only by individuals and never by organizations.
  2. It guarantees performance and the surety expects repayment by the principal. Correct answer.
  3. A surety bond transfers the risk of loss to the bondholder rather than to the surety.
  4. A surety bond provides coverage only after a lawsuit is filed.

Explanation

A surety bond is a three-party guarantee that the principal will perform an obligation; if it fails, the surety pays the obligee and generally seeks reimbursement from the principal. Insurance, by contrast, pools risk and does not ordinarily expect repayment from the insured for covered losses.

Question 40Mastering Risk Management Techniques (ARM 400)

A bow-tie analysis displays which of the following?

  1. Only the financial cost of each identified risk
  2. The frequency of past claims by policy year
  3. Threats and consequences around a hazard Correct answer.
  4. A single linear sequence from cause to final loss

Explanation

A bow-tie diagram places a central hazard or event between its threats and consequences and shows barriers intended to prevent or mitigate loss. It is a qualitative tool for visualizing controls on both sides of the event.

Question 41Mastering Risk Management Techniques (ARM 400)

HAZOP is a structured technique used primarily to:

  1. Identify process deviations and their potential consequences Correct answer.
  2. Determine the creditworthiness of a major customer
  3. Estimate the current market value of a company's physical assets
  4. Calculate the premium for a workers compensation policy

Explanation

HAZOP, or hazard and operability study, systematically examines a process for deviations from intended design conditions and evaluates their causes and consequences. It is widely used in chemical and process industries.

Question 42Mastering Risk Management Techniques (ARM 400)

Monte Carlo simulation is used in risk management to:

  1. Generate possible outcomes through repeated random sampling Correct answer.
  2. Rank risks using a simple high-medium-low scale
  3. List all hazards found during a facility walk-through
  4. Obtain expert consensus through several rounds of anonymous questionnaires

Explanation

Monte Carlo simulation repeatedly samples from probability distributions to produce a range and distribution of possible outcomes. This helps quantify uncertainty in losses, schedules, or financial results.

Question 43Mastering Risk Management Techniques (ARM 400)

A risk map or heat map is most useful for:

  1. Prioritizing risks using likelihood and impact Correct answer.
  2. Calculating the tax effect of a retained loss
  3. Replacing a business impact analysis
  4. Determining the exact premium an insurer will charge

Explanation

A risk map plots risks by likelihood and impact so that management can see which exposures require attention first. It is a prioritization and communication tool, not a pricing or tax calculation.

Question 44Mastering Risk Management Techniques (ARM 400)

In the three lines of defense model, internal audit generally serves as the:

  1. Second line, setting risk policies for the business
  2. Third line, giving independent assurance on risk management Correct answer.
  3. First line, managing risks directly within daily operating activities
  4. External reviewer with no role in the organization

Explanation

The first line is operational management, the second line is risk and compliance oversight, and the third line is internal audit, which provides independent assurance. Internal audit evaluates the effectiveness of risk management and controls.

Question 45Mastering Risk Management Techniques (ARM 400)

Which observation most strongly suggests a healthy risk culture in an organization?

  1. Risk limits are reviewed once every five years
  2. Managers are rewarded only for meeting aggressive sales volume targets
  3. Employees who raise risk concerns are protected from retaliation Correct answer.
  4. Bad news is routinely withheld from senior management

Explanation

A healthy risk culture encourages open reporting of concerns and protects people who raise them, so problems surface early. Rewards tied only to sales, infrequent limit reviews, and withheld bad news all undermine risk awareness.

Question 46Mastering Risk Management Techniques (ARM 400)

How does effective enterprise risk management most directly create value for an organization?

  1. By lowering earnings volatility and improving capital use Correct answer.
  2. By eliminating all uncertainty from the business plan
  3. By guaranteeing that no identified risk event will ever cause a loss
  4. By transferring every identified risk to an insurer

Explanation

ERM helps an organization understand and manage its aggregate risk, which can reduce earnings volatility and support more efficient allocation of capital. It does not remove uncertainty or guarantee that losses will not occur.

Question 47Mastering Risk Management Techniques (ARM 400)

Stress testing differs from ordinary scenario analysis mainly because stress testing:

  1. Produces a single best-estimate forecast of future losses
  2. Applies severe adverse conditions to test resilience Correct answer.
  3. Is required only for insurance companies, not other businesses
  4. Uses only historical data and ignores expert judgment

Explanation

Stress testing applies severe but plausible adverse conditions to examine whether an organization can withstand them. Scenario analysis may explore a broader range of plausible futures, while stress tests focus on extreme conditions and resilience.

Question 48Mastering Risk Management Techniques (ARM 400)

An insurance policy has a $1 million per-occurrence limit and a $2 million aggregate limit. After two covered occurrences each costing $800,000, how much limit remains for future occurrences in the same policy period?

  1. $400,000 Correct answer.
  2. $0
  3. $1,200,000
  4. $200,000

Explanation

Each $800,000 occurrence is within the $1 million per-occurrence limit, so the insurer pays $800,000 twice, for a total of $1.6 million. Subtracting that from the $2 million aggregate leaves $400,000 for future occurrences.

Question 49Mastering Risk Management Techniques (ARM 400)

Contingent business interruption coverage is designed to respond when:

  1. A key supplier's facility is damaged and disrupts the insured Correct answer.
  2. The insured suffers a decline in sales because of a general recession
  3. The insured's employees go on strike at its own plant
  4. The insured's own building is damaged by a covered fire

Explanation

Contingent business interruption coverage responds to physical damage at a dependent location, such as a key supplier or customer, that interrupts the insured's business. Direct business interruption covers damage at the insured's own premises.

Question 50Mastering Risk Management Techniques (ARM 400)

A risk appetite statement primarily communicates:

  1. the maximum amount an insurer will pay under a commercial property policy
  2. the capital the organization must hold to satisfy insurance regulators
  3. the types and amount of risk the organization will accept Correct answer.
  4. the specific control activities that internal audit will test during the year

Explanation

A risk appetite statement defines the amount and types of risk an organization is willing to accept in pursuit of its objectives, and it guides decision-making at every level. It is a governance document rather than a policy limit, an audit plan, or a regulatory capital figure.