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Risk Management for the Firm Exam 3

Terms in this set (105)

--- is derived from the results of data analysis to help insurers make better business decisions. Big Data has great potential to add value, but it must be obtained and analyzed with techniques that provide meaningful results. This is the goal of data science
Value of Big Data
Data science is especially useful for
unstructured data.
Big data includes
Both structured and unstructured data.
Which one of the following is a characteristic that differentiates big data from traditional data?
Velocity - or any of the 5 V's tbh.
A project team at Goshen Mutual has been working on developing a new product for the personal insurance market. The team is using geodemographic data to determine which territories would be the best to introduce the product. Geodemographic data would be categorized as?
Structured external data
In order to be useful, data should be?
Structured or unstructured
Data organized into data bases with defined fields, including links between databases
structured data
Data that is not organized into predetermined formats, such as databases, and often consists of text, images, or other nontraditional media
Unstructured data
Compare insurers' structured and unstructured data
Structured data includes the traditional data that insurers use for underwriting and claims management. This data is organized into databases that are often linked to each other. Unstructured data is not organized. There are no databases that categorize the data.
Which one of the following is a way that insurers and risk managers can use data science to improve their results through data-driven decision making?
Discovering new relationships in data
What is the first step in the data-driven decision making model?
Define the problem
Identify the steps in the data-driven decision making model
The first step in the data-driven decision making model is to define the risk management or insurance problem. The next three steps are feedback steps from the data science approach; identifying the data and ensuring its quality; modeling the data using big data analysis techniques; and achieving insights. After the feedback steps, decisions are made.
A predictive approach to data analytics involves
Providing a method to be used repeatedly to provide information
A source of a rapidly growing quantity of external data is?
The Internet of Things (IoT)
When training a predictive model, which one of the following is a reason for cross-validation to be used?
A very limited amount of training data is available, and the model's developers think it unwise to not use some of the data for training because of the need for holdout data
Which one of the following best describes the purpose of applying a predictive model to holdout data during the training process?
Applying a predictive model to the holdout data helps ensure that the model is not overfitted to the training data.
Determining the premium for an applicant for personal auto insurance involves
Supervised learning.
A data analysis technique that an insurer would likely use to analyze claims adjusters' notes is
Text mining
Which one of the following is a data analysis technique that operates in a way similar to the human brain?
Neural networks
If an insurer wants to determine the numerical value for a known target variable, it is most likely to use
Regression.
Which one of the following types of data is used to test a predictive model?
Holdout data
An insurer wants to determine the complexity of a claim at the time of first report. Which one of the following is an important step after identifying the attributes of complex claims?
Ranking the attributes according to their relative information gain
Millstone Insurance wanted to assign its most complex workers compensation claims to experienced claim adjusters as early as possible. The data science team used the classification tree technique to develop a predictive model. When holdout data was used to test the model's predictive accuracy, 45% of the complex claims were assigned to experienced adjusters. When claims were randomly assigned, only 15% of the complex claims were assigned to experienced adjusters. What is the lift provided by the predictive model?
3
Which data characteristic is concerned mainly with completeness and accuracy?
Veracity
Which one of the following types of workers compensation claims are the most difficult for insurers to identify at the time of first report?
Potentially complex claims
Which one of the following is a legal and regulatory concern in obtaining mass information from social media?
Privacy
Tania works in the fraud unit for Greatview Insurance. There is a claimant who appears to be involved in multiple cases of insurance fraud. Tania decides to use social media to obtain information that may be used to develop a profile of the claimant. Tania's use of social media is an example of which one of the following types of data?
Unstructured external
Which one of the following is correct regarding insurers' and risk managers' internal data?
Insurers and risk managers have vast quantities of internal data they have not used
The descriptive approach is applied
When an insurer or risk manager has a specific problem.
Currently, insurers process which portion of their available structured data?
A Low Percentage
In the context of a predictive model, a true positive results when the model
Correctly predicts a positive.
Which one of the following measures only the positive results of a model?
Precision
Which one of the following is an example of exploratory data analysis?
Correlation matrix
Nancy, the general liability claims manager, is concerned about a significant rise in claim frequency in the state of New Jersey during the past 18 months. She cannot identify the cause of the increase and has asked James, a data analyst, to help. James decides to develop a model to analyze the dataset of New Jersey claims, and see if any previously unknown grouping can be identified for further analysis. Which one of the following data analysis techniques is James using?
Cluster analysis
William works in the special investigative unit for Millstone Insurance. He has been working on a group of auto liability claims with multiple fraud triggers. William was able to trace links between the web pages of the lawyers and several medical care providers involved in the claims. Which one of the following analytical techniques is William using?
Social Network Analysis
In the future ___ will evolve further to provide better analysis of data from visual images and auditory sources
Artificial intelligence.
Which of the following indicates the values of the target variable on a classification tree?
leaf node
A branch of a classification tree that leads to a classification of a target variable ends at
Leaf node.
Three Hills Insurance had a problem with predicting which workers compensation claims would develop into long term disability claims. The data science team decided to use a classification tree technique to develop a predictive model based on the attributes of long term disability claims. The availability of light duty work was determined to be the most informative attribute. Which one of the following parts of the classification tree should be assigned to this attribute?
Root node
Which one of the following explains why a computer recursively applies a model?
To analyze different splits in the values of attributes
Which one of the following correctly describes lift in evaluating a predictive model's effectiveness?
Lift is the percentage of a model's positive predictions divided by the percentage expected by chance
When examining a model's results, insurance and risk management professionals should defer to
Their professional experience
A data analysis technique that an insurer would likely use to analyze claims adjusters' notes is
Text mining
Which one of the following best describes the purpose of applying a predictive model to holdout data during the training process?
Applying a predictive model to the holdout data helps ensure that the model is not overfitted to the training data.
Durham Insurance is developing a predictive model to determine the likelihood that newly licensed drivers will have an accident within the first two years of receiving a license. Durham has data on 500 new drivers. A predictive model based on 400 drivers shows a strong correlation between drivers under age 18 and accidents in the first two years. Before using the model for underwriting purposes, Durham Insurance runs the data on the remaining 100 drivers through the model to confirm that the correlation is significant. The data on the remaining 100 drivers is known as
Holdout data.
___ is the value today of money that will be received in the future
Present Value
Which one of the following has the lowest present value?
$1,000 to be received 10 years from today, assuming a 9 percent interest rate.
The process by which the present value is calculated is called
discounting.
What is applied to a future value in order to calculate its present value?
number of periods & rate of return
In calculating the present value of a stream of equal future payments, which one of the following is true?
It is equal to the sum of the present values of each of the separate payments.
What do we call a series of fixed payments made on a specified date over a set period?
Annuity
The ___ technique for evaluating an investment is based on discounting the related cash outflows and inflows using a required rate of return.
Net Present Value
When making investment choices, companies generally adhere to what is known as the - what is the name of the RULE?
NPV Rule
When calculating the differential annual after-tax net cash flows for investment proposals, differential cash expenses that may be attributable to an investment proposal include such items as
Maintenance and insurance expenses.
In considering uncertainty in cash flow analysis, the greater the risk of future net cash flows
The greater the minimum required rate of return.
The recognition of expected accidental losses in cash flow analysis
May have a significant effect on the decision to undertake a proposal.
What best describes the impact upon net present value (NPV) when loss control measures are added to a capital investment project?
Loss control measures may increase or decrease the NPV
Sharon wants to replace her computer in three years. She estimates that the new computer will cost $2500. In order to determine the amount of money Sharon must invest today at a given rate to have $2500 at the end of three years, she must calculate the
Present value of the amount needed in the future
Which one of the following is the correct explanation of how expected accidental losses associated with a project should be considered when evaluating a capital budgeting project?
The expected accidental losses should be subtracted from cash revenues before taxes are considered.
Pinewood Manufacturing's management team is evaluating a proposal to build an addition to the plant. The NPV and IIR of the proposal are less than they had anticipated. However, the company's risk manager explains the installation of a sprinkler system in the building can make the proposal more attractive. All of the following correctly describe the effect the sprinkler system has on the proposal's net cash flow, EXCEPT
The maintenance expenses for the sprinkler system would be added to the cost of the proposal's initial investment.
What is true with regard to a manufacturing company using call options to hedge the cost of a raw material?
Using call options may actually reduce the profitability of a transaction.
The formulas for calculating future and present value rely on several common variables. One of these common variables is the
Number of times per year interest is paid.
To evaluate capital investment proposals using the net present value method, all of the following information is required, EXCEPT
The discount rate at which the present value of a proposal's rate of return is zero.
How do we express the NPV of a proposed asset or activity?
Present value of the sum of future net cash flows minus present value of the initial investment.
Using the NPV method, an acceptable proposal is any proposal that does what?
Projected cash inflows have a present value greater than the present value of the required outflows.
To evaluate capital investment proposals using the NPV method, which one of these pieces of information is required? Don't know the specific question; however, this is required
1) the amount of initial investment, 2) the acceptable annual rate of return, 3) the amount and timing of the differential (incremental) annual after-tax net cash flows associated with the proposal over its estimated useful life and 4) the salvage value (if any) of the investment.
Organizations have two types of expenditures; they are what?
Operating expenditures and capital expenditures.
The process of evaluating alternative capital investment proposals in terms of the cash outlays that the proposals require and the present values of the cash inflows that the proposals are likely to generate is referred to as
capital budgeting.
What do we call the disbursement for assets that would be consumed in a relatively short period, usually within a year, or within a single accounting period?
Operating expenditures
What do we call the disbursement for assets that would be consumed in a relatively long period, usually over multiple accounting periods?
Capital expenditures
What is an accounting method that spreads out the expense of purchase over the life expectancy of the item?
Depreciation expense
What kind of financial transaction is which one asset is held to offset the risk that is associated with another asset?
Hedging
Somebody chairs the audit committee of an insurance company's board of directors. He is a retired chief financial officer of another insurance company. The other members of the board other than the chairman know little about insurance company accounting. At a recent board meeting, this person challenged the vice president of accounting and finance, saying "can you provide more background in your report," to the board. Understand why the ratio of net premiums written to surplus is important. But why? Don't know...the way it was worded was strange
maybe constructive tension or communication in general
Which of the following requires a CEO and CFO of a publicly traded company to certify the financial statements are correct and requires the public companies report operational risk to the company's shareholders?
The Sarbanes-Oxley Act
What is the law passed in 2002 that requires CEO's and CFO's to certify the accuracy of the corporation's quarterly annual financial reports?
Sarbanes-Oxley Act
A company's board of directors has several committees, including an audit committee. What is the primary role of the audit committee?
A board audit committee is tasked with ensuring that the organization is in compliance with its stated internal procedures as well as with legal and regulatory requirements.
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework list five interrelated components of internal controls. Which one of the following components forms the basis for carrying out all of the organization's other functions and establishes the lines of authority within the organization?
Control Environment
What group of individuals within an organization is responsible for establishing effective internal controls to monitor risk?
Management
When Cameron was named president and CEO of XYZ Insurance Company, he knew there were morale issues with many employees. The previous president was a task master who had alienated many employees. One of Cameron's first moves was starting the "Third Thursday of the Month Program." On the third Thursday each month, lunch was provided to employees. All of the officers, including Cameron, were available to meet with the employees to answer questions and discuss the company's values. At some of the meetings, employees are given questionnaires to provide feedback to management. The open forum with employees and eliciting feedback through questionnaires are examples of
soft controls
Many organizations are required to have an external auditor verify their financial statements. The external auditors also test financial reporting systems and internal controls to check that the systems are reporting transactions correctly. The approval of a company's financial statements by an external auditor is
Report Certification
Which one of the following is a responsibility of internal auditors?
To validate that internal controls are in place, functioning, and meeting design objectives
While performing its annual internal audit of Investment Company, Claire discovered that an employed broker was embezzling funds from clients. When asked how she discovered the embezzlement, Claire said, "We have thousands of clients and 45 brokers who perform thousands of transactions each year. We focus on transactions of $10,000 or more. One transaction showed 100 shares sold for $101.50 per share on a certain day. The stock's trading range that day was $103 to $104. The broker reported the sale at the lower price, sold the stock at a higher price, and pocketed the difference. Once we found that transaction, we reviewed all of his trades and discovered he was an embezzler." When asked why the original focus was transactions of $10,000 or more, Claire said, "We can't examine every transaction, so we focused on those large enough to be significant. The focus on transactions large enough to pose a financial threat to Investment Company illustrates
materiality
Reduced capital costs, more favorable business terms, and greater interdepartmental communication are all benefits of what?
Risk Assurance
The level of confidence an organization places in the organization's risk management culture, practices, and procedures is called
Risk Assurance
A process in which managers perform an annual self audit of the level of confidence they have in the risk management culture, practice and procedures in their area is call
A control risk self assessment
The board of directors of Insurance Company wants assurance that the company's recently-instituted "commitment to risk management" has been communicated to and accepted by all company employees. Which one of the following would be the best method to determine if employees had been informed of the commitment to risk management and had accepted it?
Ask the internal audit department to administer a risk management questionnaire to employees.
At each board of directors meeting at XYZ Insurance Company, each vice president gives a report on his/her area. Darlene is the Vice President of Investments. During one portion of her presentation, she reviews whether the portfolio is in compliance with each of the company's investment guidelines (e.g. no more than 15 percent of the portfolio may be invested in equities, no more than two percent of the portfolio may be invested in securities issued by the same company, all bonds must be investment grade, etc.). The reporting format that Darlene uses for this portion of her presentation is called a
scorecard.
Risk management reporting should focus on financial and nonfinancial metrics used to help define and measure losses. These metrics are called
Key risk indicators.
Board of directors needs risk management information to properly oversee a company. Under one reporting approach, each department produces and submits its own report. A better approach aggregates information and describes the effect across all departments. This better approach, which gives the board a more precise and useful picture is called what?
Integrated reporting.
Which one of the following statements about risk management monitoring and reporting is true?
Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program.
Recent trends in government regulations have instituted more formal requirements for the board of directors of organizations. This is especially true for organizations involved in
Financial Services
Ultimate responsibility for an organization's risk management rests with the board of directors. Which one of the following broad categories involves risk that arise from people, processes, systems, or controls?
Operational Risk.
A question about responsibilities of the chief risk officer CRO. Don't know the exact question; however
the CRO serves as the primary executive in charge of risk management throughout the organization. The CRO has direct line authority over the risk management department and indirect authority over the risk management planning process in all other line units.
Helen is a member of ABC Insurance Company's board of directors. She chairs the audit committee and is a member of the risk management committee. Helen ordered a review of company policies and procedures to make sure ABC managers were complying with company guidelines. This review found that one person could write checks for claims under $500 without a second person signing-off on the payment. Although no losses occurred, the small claims payment procedure was modified so that a second person had to approve issuance of the check. The review that Helen ordered is called
Internal Audit
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) grouped internal control objectives into three categories. One category of objectives deals with how well an organization meets numerous local, national, and international laws. This category of objectives is
Compliance objectives
Chief legal council at an insurance company, the board wants to make sure that the company's internal controls are current and working properly, so they ask this legal council to review them in each functional areas. To test the system, she had three fictitious claims submitted to the system for payment. Because the claims were not sufficiently documented, they were not paid, and were flagged for investigation. Which component of the COSO framework for internal controls did she identify
Monitoring.
Example of an internal control at an organization which is a hard control
process checklist
The practice of using an organization's limited internal audit resources in those areas with the highest priority is called
risk-based auditing
When Courtney was a member of the Information Services department at ABC Company, she designed an electronic system to track all of ABC's accounting transactions. She was recently promoted to internal auditor of ABC Company. An obvious problem with Courtney's new position with regard to reviewing the accounting system she designed is
Interdependence.
Which one of the following is a benefit to the organization from greater risk assurance?
Reduced capital costs.
Control Risk Self-Assessment (CRSA) is a process generally performed by which one of the following?
Unit managers.
Which one of the following statements is true regarding an effective risk reporting system?
"There is no single standard for report formats. Each organization designs its own reporting system based on its needs. The most important characteristic of the report format is that it be useful to the user."
Which one of the following is an example of a report that would most likely contain both quantitative and qualitative data?
A customer satisfaction survey
Risk reports should be focused on business objectives as well as compliance with regulatory requirements. reports should identify risks that are increasing or decreasing, risks that need immediate attention, and risks that require further analysis to determine their eventual effect. These characteristics of risk reporting demonstrate
functionality
Which one of the following broad categories of risk that an organization, board of directors must oversee include risks that arise from trends in the economy or society?
Strategic risks
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