31, Implementing ERM Flashcards

1
Q

What is proportionality?

A

Framework appropriate to one org (eg small motor insurer) not appropriate to diff one (e.g. global composite insurer), i.e., one size doesn’t fit all

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the Pareto principle?

A

 For ERM to add value, RM activities must feed through into action
 Take decisions based on data, info and analysis
 80% must be in data collection, analysis and reporting/ 20% in decision making. But 80% of value of ERM is due to informed decision making

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the 4 key questions you must ask if you want ERM to be implemented successfully

A
  • Governance structure and politics – who’s responsible for risk oversight and critical RM decisions?
  • Risk assessment and quantification- how (ex-ante) will they make decisions?
  • Risk management- decisions to be made to optimise risk/return profile?
  • Reporting and monitoring- how (ex-post) will decisions be monitored
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the 3 stages of ERM implementation

A
  1. Loss reduction- protect against downside losses
  2. Uncertainty management
  3. Performance optimisation - use in decision making
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Outline controls that may be used as a form of loss reduction

A

o Credit controls – reduce P(default) and maximise recovery
o Investment + liquidity policies – minimise portfolio losses + ensure liquidity, by perhaps adopting lower-risk investment policies
o Other internal controls – reduce probability and severity of operational losses
o Audit processes- ensure finances in order
o Insurance coverage – risk transfer to 3rd parties

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Outline controls to manage uncertainty/volatility?

A

o Credit models- better understand credit risk, predict and make provision for losses
o Market measurement and management techniques – e.g., simulation models, measurement tools incl. VaR and economic capital
o Increased management of operational risks, esp. crisis management + prevention
o Improved corp gov policies
o Wider application of risk transfer- derivatives, sophisticated insurance products, ART

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Outline three business activities to optimise performance

A

o Active credit risk portfolio management – pricing for risk and disaggregating credit business into distinct activities
o Active balance sheet management – consider all A+L to optimise risk/reward trade-off
o Re-engineering processes to minimise operational risk and better understand + reduce costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are some challenges with ERM implementation?

A
  1. Promoting risk awareness
  2. Implementing a culture change
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are some strategies to promote risk awareness?

A
  • Set tone from top -CEO act as role-model
  • Ask right “risk” questions:
    o Return/risk balance
    o Limits and controls to minimise downside risk
    o Systems
    o Knowledge
  • Ensure common risk taxonomy
  • Induction and ongoing train
  • Link compensation to tisk to reward desired behaviours
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How can you implement a culture change

A
  • Set tone from top
  • On an incremental basis
  • As profile of new recruits changes staff views
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

List 4 ERM maturity models

A
  1. Lam’s 5 stage ERM maturity model
  2. McKinsey 4-stage ERM maturity model
  3. Deloitte 5-stage ERM maturity model
  4. IAA stages of ERM maturity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are some key questions to ask when considering ERM maturity according to IAA?

A
  • Board- what is their role?
  • Risk appetite- how well is it defined, reviewed and communicated?
  • Risk management policy- how comprehensive is it?
  • Management accountabilities- how clearly are they defined?
  • Management commitment and leadership – how committed is management to ERM?
  • RMF- what responsibilities and resources does it have?
  • Risk “language” – how well developed and documented is it?
  • Risk management culture- how well developed is it?
  • Performance management and reward systems- how well aligned with ERM are they?
  • Risk and solvency assessments – how sophisticated are they?
  • Reporting and monitoring processes and systems- how comprehensive are they?
  • Internal audit of compliance with risk management policy- how comprehensive is it?
  • New activities- to what extent are RM techniques applied?
  • Business continuity plans / analysis- how comprehensive are they?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly