ARM - Associate in Risk Management Hazard and Operational Risks Questions and Answers — Questions and Answers
Question 1: A smartphone manufacturer relies exclusively on one supplier in a single geographic region for its high-resolution camera sensors. A fire at the supplier's factory halts production for six months, causing a major disruption. This situation is a primary example of which type of operational risk?
- People risk stemming from inadequate employee training.
- Systems risk related to internal software failure.
- Process risk due to single-source dependency. (Correct answer)
- Legal risk from non-compliance with regulations.
Correct answer: Process risk due to single-source dependency.
This scenario highlights a process risk, specifically the vulnerability created by a single point of failure in the supply chain. Over-reliance on a single supplier is a classic operational process risk that can be triggered by an external event (like a fire at the supplier's facility). The other options are incorrect as the root cause is not related to employee actions, internal systems, or legal compliance.
Question 2: When insuring a commercial building, an organization chooses a valuation method that will pay the cost to repair or replace the damaged property with materials of like kind and quality, without any deduction for depreciation. Which property valuation method is being used?
- Actual Cash Value (ACV)
- Functional Replacement Cost
- Market Value
- Replacement Cost (RCV) (Correct answer)
Correct answer: Replacement Cost (RCV)
Replacement Cost (RCV) coverage is defined as the cost to replace the damaged property with new property of comparable material and quality, without a deduction for depreciation. Actual Cash Value (ACV) subtracts depreciation from the replacement cost. Functional Replacement Cost involves replacing with less expensive but functional materials, and Market Value is what the property would sell for on the open market.
Question 3: An organization is heavily dependent on its lead software architect, who possesses unique, undocumented knowledge critical to the company's core product. Which of the following best describes this operational risk and a common risk financing technique used to address it?
- Reputational risk; managed by public relations campaigns.
- Key person risk; managed by purchasing key person life and disability insurance. (Correct answer)
- Systemic risk; managed by diversifying the company's product lines.
- Legal risk; managed by retaining a corporate law firm.
Correct answer: Key person risk; managed by purchasing key person life and disability insurance.
This is a classic example of key person risk, an operational risk stemming from over-reliance on a specific individual's skills and knowledge. Key person life and/or disability insurance is a common risk financing tool that provides the company with funds to manage the financial impact and transition if that person is unexpectedly lost.
Question 4: A plastics manufacturing plant experiences a fire that severely damages its primary production line, forcing a shutdown for three months. While property insurance covers the cost to repair the machinery, the company loses $5 million in profits and incurs extra expenses to outsource some production temporarily. These lost profits and extra expenses are classified as what type of loss?
- Direct loss
- Business income (interruption) loss (Correct answer)
- General liability loss
- Asset depreciation loss
Correct answer: Business income (interruption) loss
A business income loss, also known as business interruption, is an indirect or consequential loss. It results from a direct loss (the physical damage from the fire) and is designed to cover the net income that would have been earned and any continuing normal operating expenses. Direct loss refers only to the physical damage to the property itself.
Question 5: Following a significant operational failure where a batch of product was contaminated, a risk manager leads an investigation. The team repeatedly asks "Why?" to trace the issue from the immediate cause back to underlying management system weaknesses. Which analysis technique is being applied?
- Event Tree Analysis (ETA)
- Failure Mode and Effects Analysis (FMEA)
- Root Cause Analysis (RCA) (Correct answer)
- Scenario Analysis
Correct answer: Root Cause Analysis (RCA)
Root Cause Analysis (RCA) is a retrospective problem-solving method used to identify the fundamental causes of an incident. The "5 Whys" is a common technique used within RCA to drill down past superficial causes to the true root of the problem, ensuring corrective actions prevent recurrence.
Question 6: A company operating a large fleet of delivery vehicles installs a telematics system that monitors speed, braking patterns, and route adherence. The data is used to provide targeted coaching to drivers and enforce safety policies. This implementation is primarily an example of which risk control technique?
- Risk Avoidance
- Loss Prevention (Correct answer)
- Risk Transfer
- Loss Reduction
Correct answer: Loss Prevention
Loss prevention techniques are designed to reduce the frequency of losses. By monitoring and correcting unsafe driving behaviors, the telematics system aims to prevent accidents from happening in the first place. In contrast, loss reduction techniques (like airbags) reduce the severity of a loss after it occurs, while risk transfer shifts the financial consequences to another party.
ARM - Associate in Risk Management Hazard and Operational Risks Questions and Answers
A smartphone manufacturer relies exclusively on one supplier in a single geographic region for its high-resolution camera sensors.
A fire at the supplier's factory halts production for six months, causing a major disruption.
This situation is a primary example of which type of operational risk?