25. Analysing other risks Flashcards
Give a list of other risks
- Liquidity risk
- Non-life Insurance risk
- Demographic risk
- Climate change risks
Outline the two kinds of liquidity risk
- Funding – risk of money markets being unable to supply money when required
- Market- risk of market capacity being unable to handle asset transactions when deal is required without material impact on price
What are the difficulties of assessing liquidity risk
o Limited past data on liquidity crises
o Degree and nature of exposure diff so industry data or other analogue models may not work
List 3 ways in which liquidity risk can be assessed
- Scenario analysis
- Stress testing
- Basel III
Outline how scenario analysis can be used to determine liquidity risk
- Model cashflows for the organisation
- Assess liquidity risk by looking at scenarios where cash outflows exceed available cash in future
- Must allow for appropriate interactions between risks- esp between market and interest-rate risks
- Must consider short and long term scenarios
Give examples of scenarios for banks and insurance companies
- Rising interest rates – e.g., depositors transferring funds elsewhere for higher returns
- Rating downgrade
- Large operational loss leading to sudden reduction in cash-like assets
- Large single insurance claim or large set of claims from associated events leading to reduction in cash assets
- Losing control over key distribution channel – leading to loss of expected revenues
- Impaired capital markets- investors may be unable to provide fresh capital when needed
- Sudden termination of large reinsurance contract – insurer exposed to large outflows with no expected inflows from reinsurer
Give examples of stress test scenarios for liquidity
o Collapse of major customer = lost revenue
o Inability to refinance large debt due to mature soon
Outline the liquidity rations under Basel III
- Liquidity Coverage Ratio (LCR) – ensures banks can survive one month stress scenario
- Net Stable Funding Ratio (NSFR) – consider funding over one-year
- Must >= 100%
Define demographic risks
Risk from population changes impacting both customers and employment. Can be broken into:
o Level / underwriting risk
o Reserving risk:
What are the 3 types of reserving risk?
Volatility- uncertainty wrt actual future immediate short term morlatility experience. Only have finite data»_space; can’t precisely measure»_space; will be statistical variances
Catastrophe – extreme form of volatility risk e.g. natural disasters
Trend/cycle – future long term changes in claim incidence and intencity
How would you assess underwriting risk
- Risk rating
- Experience rating
- Can combine the two with credibility weights Z on experience and 1-Z on risk
How would you assess volatility risk
- Stochastic/ probabilistic model e.g. binomial, poisson
- Assessment must reflect that volatility varies by age
- Use Poisson MLE:
o Calc expected number of deaths at each age using model to be fitted and set it equal to poisson distribution
o Calc number of observed deaths at each age based on posson distribution derived above
o Fitted parameter found by maximising likelihood function, ie product of the probabilities (for all ages) that were determined in preceding step.
How would catastrophe risk be assessed
- Scenario analysis
Outline non-life insurance risk
- Level
- Reserving – volatility, catastrophe and trend
- Can also be divided into
o high frequency e.g. motor
o low frequency – excess of loss reinsurance
How would non-life insurance risk be modelled
o Intensity of claims must be modelled»_space; more uncertainty
o Possibility of more than 1 claim per policy
o Potential for each policy to move through many diff states over its lifetime
