FRM Part II · FRM Exam Part II · Risk Mitigation
A bank faces a low-frequency, high-severity risk of a data center fire. It buys property insurance with a large deductible and also builds a hot-standby site. Which statement best describes the residual exposure after these actions?
The bank still retains the deductible and any uninsured consequences such as reputational damage and service disruption. Insurance transfers only part of the financial loss, and the standby site reduces impact without eliminating it, so residual risk remains even with both mitigants in place.
- AInsurance eliminates all operational risk from the event, so the standby site is redundant
- BThe standby site transfers the financial loss to the insurer
- CThe deductible portion of the loss and uninsured consequences such as reputational damage and service disruption are retained by the bankCorrect
- DThe residual risk is zero because two mitigants are in place
Explanation
Insurance pays only above the deductible and typically excludes reputational and many consequential effects. The standby site reduces impact but does not remove all risk. The bank therefore retains the deductible and uninsured consequences. Insurance does not make resilience measures redundant.
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