FRM Part II · FRM Exam Part II · Risk Mitigation
A bank considers insurance mitigation under an advanced measurement approach-style framework. A risk manager notes that the insurance policy has a one-year term with a 90-day cancellation notice, and claims are historically settled after about 18 months. Which concern is most directly raised by these features?
The main concern is that the short term, cancellation right and slow claim settlement make the insurance cover less certain and less timely, so only a reduced mitigation benefit should be recognised in capital or risk assessments.
- ALow recognition of mitigation benefit because of residual term and payment uncertaintyCorrect
- BOverstated frequency of loss events in the loss data
- CDouble counting of expected loss in pricing
- DExcessive diversification across business lines
Explanation
Short residual terms, cancellation rights and slow or uncertain payment reduce how reliably insurance will respond when needed, so supervisors and risk managers haircut or limit the recognised mitigation benefit. The other options concern unrelated issues.
Did you get it right without looking?
One question tells you little. A timed set on Risk Mitigation shows your real accuracy, how long you take and where you lose marks.
More Risk Mitigation questions
- A bank estimates a ransomware event has an annual probability of 10% and an expected loss of USD 20 million per event. A proposed control su…
- Which testing approach best demonstrates that a firm can actually remain within its impact tolerances for an important business service duri…
- A bank's payments unit identifies that a manual reconciliation step causes frequent errors. Management decides to automate the step and add …
- After a breach investigation, a bank finds that an attacker used stolen credentials of a vendor to move laterally from a low-sensitivity rep…
- A global bank relies on one cloud provider for its card authorisation service. A resilience review finds that both the primary and backup en…
- During due diligence on a prospective cloud service provider, which finding should most concern a bank's risk committee when the service sup…