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FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

A global insurer identifies that a prolonged failure of a cloud provider used by many financial institutions could disrupt payments across the sector at once. In emerging-risk terms, which feature of this exposure makes it especially hard to manage with traditional firm-level diversification?

The key feature is concentration in a common third-party provider, which produces correlated, systemic operational exposure. Because many institutions rely on the same cloud provider, one failure hits them together, so firm-level diversification and own capital buffers cannot eliminate the risk.

  1. AConcentration in a common third party creating correlated, systemic operational exposureCorrect
  2. BLow severity but high frequency of events
  3. CPure market risk driven by interest rate changes
  4. DExposure that can be eliminated through the firm's own capital buffers alone

Explanation

Many firms depend on the same provider, so failures are correlated across institutions. Diversifying within one firm does not remove this common dependency. It is operational and systemic, not market risk, and own capital cannot eliminate sector-wide disruption.

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