RIMS Client Advisory & Consultation 2 — Questions and Answers
Question 1: A risk manager is advising a client whose board has asked for a risk appetite statement. Which element is MOST critical to include in that statement?
- A list of all insurable risks the company faces
- Quantitative and qualitative thresholds that define acceptable risk levels (Correct answer)
- The names of insurers and coverage limits currently in place
- A historical record of past claims and losses
Correct answer: Quantitative and qualitative thresholds that define acceptable risk levels
A risk appetite statement must define both quantitative and qualitative thresholds so stakeholders understand which risk levels are acceptable versus which require escalation or mitigation.
Question 2: During a client consultation, the advisor discovers the client's current property coverage has a co-insurance clause of 80%. The insured value is $4M but the property is worth $10M. If a $2M loss occurs, what is the primary advisory concern?
- The deductible is too high to make a claim worthwhile
- The client will receive only a fraction of the loss due to co-insurance penalty (Correct answer)
- The insurer will cancel the policy upon discovering the undervaluation
- The client should switch to a blanket policy immediately
Correct answer: The client will receive only a fraction of the loss due to co-insurance penalty
Because the insured value ($4M) is below the required 80% of actual value ($8M), the co-insurance formula will reduce the claim payout significantly below the actual $2M loss.
Question 3: A client asks their risk advisor to help prioritize risks using a heat map. What does a heat map primarily plot?
- Premium cost versus deductible size for each risk
- Likelihood of occurrence versus potential severity of impact (Correct answer)
- Number of claims versus average claim duration
- Geographic distribution of insured assets versus catastrophe zones
Correct answer: Likelihood of occurrence versus potential severity of impact
A risk heat map plots probability (likelihood) on one axis and impact (severity) on the other to help visually prioritize which risks demand the most attention.
Question 4: When advising a multinational client on a global insurance program, which structure allows local policies to fill gaps where a master policy cannot respond due to local regulations?
- Umbrella program
- Difference in Conditions (DIC) / Difference in Limits (DIL) structure (Correct answer)
- Captive fronting arrangement
- Quota share treaty
Correct answer: Difference in Conditions (DIC) / Difference in Limits (DIL) structure
A DIC/DIL structure layers local admitted policies beneath the master policy so that local regulatory requirements are met while the master policy fills any gaps in coverage or limits.
Question 5: A client's CFO questions the value of a risk management program that has had no major claims for three years. What is the BEST advisory response?
- Recommend reducing insurance spend since claims experience is favorable
- Explain that absence of claims may reflect the program's effectiveness and present total cost of risk data (Correct answer)
- Acknowledge that the program may be over-engineered and propose cuts
- Transfer all retained risks to a new captive to demonstrate savings
Correct answer: Explain that absence of claims may reflect the program's effectiveness and present total cost of risk data
A skilled advisor frames low claims as potential evidence of effective risk controls and presents total cost of risk (TCOR) metrics to demonstrate overall program value beyond just claims.
Question 6: Which communication technique is MOST effective when a risk advisor needs to convey complex technical insurance terms to a non-expert client executive?
- Provide a full policy document for the executive to review independently
- Use analogies, plain language summaries, and visual aids tailored to the audience (Correct answer)
- Defer all explanations to the broker and focus only on pricing
- Send a written memo using standard industry jargon for precision
Correct answer: Use analogies, plain language summaries, and visual aids tailored to the audience
Translating technical concepts into plain language with analogies and visuals ensures executive stakeholders understand risks and make informed decisions without being overwhelmed by jargon.
Question 7: A client is deciding whether to retain or transfer a specific operational risk. Which analytical framework is MOST appropriate to guide this decision?
- SWOT analysis of the risk management department
- Cost-benefit analysis comparing retention costs (expected loss + admin) versus transfer costs (premium) (Correct answer)
- Review of competitor insurance purchasing decisions
- Actuarial reserve calculation for the insurer's pricing model
Correct answer: Cost-benefit analysis comparing retention costs (expected loss + admin) versus transfer costs (premium)
The retain-versus-transfer decision is best guided by comparing the total cost of retention (expected losses plus administration) against the cost of transferring the risk via insurance premium.
RIMS Client Advisory & Consultation 2
A risk manager is advising a client whose board has asked for a risk appetite statement.
Which element is MOST critical to include in that statement?