29.2 Risk reporting

Question 1

Risk portfolio

Answer 1

•Categorises various risks with quantified impact and probability

Question 2

Risk response

Answer 2

• Extension of risk portfolio showing how risk has been dealt with
  
  • Avoid
  • Retain (+ capital needed)
  • Diversify (+ revised assessment of remaining risk)
  • Mitigate (“ “ “)

Question 3

Risk register

Answer 3

Details of retained risks incl:

• Control measures
• Reassessment of impact and value after controls
• Risk owner
• Board committee/senior managers overseeing risk
• Identified concentrations of risks and their need for management action

Question 4

Importance of risk management

Answer 4

• Identify new risks
• Better understanding
• Determine appropriate risk and control systems
• Proactively monitor and manage effectiveness of risk and control systems
• Assess changes in risks over time
• Assess interaction between individual risks
• Appropriately price, reserve and determine capital requirements

Question 5

Importance of management for other stakeholders

Answer 5

• Shareholders (or potential) = better understand attractiveness of business investment
• Credit rating agencies = appropriate ratings
• Give regulator more understanding of areas within business which may require more scrutiny

Question 6

Reporting at enterprise level

Answer 6

•If 2 units are allocated risk diversifying away at enterprise level, …
… but one doesn’t take on risk exposure&raquo_space;> increase capital requirements of business (risk exposures not matched&raquo_space;> extra capital for unbalanced risks taken on)

• If diversification between units is used to reduce capital reqs, each unit has to report data at more granular level than their own total capital req to the group.
• May be costly&raquo_space;> trade-off between costs of additional analysis to minimise capital reqs AND cost of holding additional capital if risk diversification isn’t assumed.

Question 7

External reporting

Answer 7

• Usually as capital required to protect against ruin at certain prob

Question 8

Issues with external reporting

Answer 8

 Whether ruin prob must be expressed over 1 year/whole run-off of business
 Stochastic models may have impractical run times So, may use correlation matrix but populating it is subjective.
 Interactions between risks may mean effect of multiple risk events is greater or less than sum of individual risks
 May be tempted to think of risk events that have occurred which are likely more common than required ruin prob.
 Care when past data to estimate future consequences