28. Accepting risk Flashcards
1
Q
What is an example of a quantifiable risk appetite statement?
A
- The organization will not accept risks that would cause its available capital to fall below x% of the regulatory MCR.
2
Q
What features of the company might influence its risk appetite?
A
ESPECIAL
- Existing exposure to a particular risk
- Size of company
- Period of time for which it has operated
- Previous experience of board members
- Existence of a parent company or other guarantors
- Culture of company
- Institutional structure
- Attitude towards risk of owners and other capital providers
- Level of available capital
- Level of regulatory control to which it is exposed
3
Q
How does a market for risk arise?
A
- Different entities have different appetite for risk=> market in risk
- Enables risk to be transferred from entities with small risk appetite to large risk appetite
- All financial transaction=> transfer of risk for payments
4
Q
What makes a market for risk transfer “risk efficient”?
A
- Reasonable size
- Participants with excess risk
- Transfer excess risk to
- Other participants with less risk
- and are willing to take on more risk than they currently possess
5
Q
Give an example of pairs of individuals with different appetites of risk that want to transfer risk?
A
- Policy holder ceding risk to an insurance company
- Insurance company ceding risk to a reinsurance company
6
Q
How does investment in a CIS result in risk transfer?
A
- CIS allow individuals to transfer risk of making poor investment decisions due to a lack of expertise or lack of time to perform research
7
Q
How are risk and product design related?
A
- Financial products transfer risk between parties
- Price of the product cover cost of risk transferred+ profit margin
- Cost of risk= Risk covered+ business risks
- Good product design techniques=> will identify all risk involved+ risk management for each
- Appropriate premium rating requires to perform risk classification
- Risk new product design does to meet needs + desires of beneficiaries
- Additional options=> introduce new risks and need to be allowed for in the costing
8
Q
What factors make a risk insurable?
A
PAR
- Policyholder must have an interest in the risk (insurance vs wager)
- claim Amount must bear some relationship to the financial loss incurred
- Risk must be financial and reasonably quantifiable
9
Q
Why do insurance companies aim to pool risk?
A
- Law of large numbers=> Greater certainty in the future payments on the occurrence of the insured event.
10
Q
What additional criteria should a risk meet to be insurable?
A
MUD PIS
- Moral hazard eliminated as far as possible
- Ultimate limit on the liability undertaken
- Data exists with which to price the risk
- Pooling a large number of similar risks
- Independent risk events
- Small probability of occurrence
