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FRM Part II · FRM Exam Part II · Integrated Risk Management

An insurer's ERM team is deciding how to respond to an identified risk. The risk has high likelihood and high severity, and the activity generating it contributes little to strategic objectives. Which response is most consistent with an ERM framework?

Avoiding the risk by exiting the activity is the most consistent response, because the risk is both likely and severe while the activity offers little strategic benefit. Accepting it, expanding it, or monitoring it less would leave the firm exposed to large losses without adequate reward.

  1. AAvoid the risk by exiting or discontinuing the activityCorrect
  2. BAccept the risk without further action
  3. CRetain it and increase the business's growth target
  4. DReduce monitoring frequency to cut costs

Explanation

When a risk is both likely and severe and the activity adds little strategic value, avoidance is the appropriate response. Acceptance suits low-impact risks, and raising growth or reducing monitoring would increase exposure without compensation.

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