7. Proprietary risk frameworks Flashcards
What is a credit rating?
- Rating issued by credit rating agency as indication of creditworthiness or lack thereof
- Assigned for issuers and the issue
What is a drawback of credit ratings?
Paid for by companies the credit agency is assessing so under pressure to give good ratings to companies.
Whar are factors thart affect the assessment of ERM capability?
- Complexity of insurer’s risks
- Available capital and ease of access
How does the S&P work?
- Assign one person to each firm that it assigns ratings for
- Subjective combination of factors arising from the rating framework
Which 3 risk elements are in the S&P framework?
- Sovereign risk analysis
- Business risk analysis
- Financial risk analysis
What are the elements of soverign risk analysis?
- Tax
- Currency controls
What are the elements of business risk analysis?
- Industry prospects
- Lack of diversification
- Diseconomies of scale
- Operational risks
- Management quality and structure
What are the elements of financial risk analysis?
- Profit level
- Cashflow
- Capital structure and flexibility
What are the 5 areas the S&P considers when measuring ERM capability
- Risk management culture
- Risk control
- Extreme event management
- Risk and capital models
- Strategic risk management
Define risk management culture
Degree to which risk and risk management are NB considerations across all business decision-making
What are the dimensions of risk management culture
o Risk and risk appetite philosophy
o Governance and organisational structure of RMF
o External and Internal risk and risk management disclosures + communication
o Degree to which there is understanding and participation in RM across company
How does S&P assess risk management culture?
- Has developed suite of favourable and non-favourable indicators
- Only assess as effective if they judge every manager to contribute to RM culture without direction from RM staff
How does S&P assess risk control?
- Assess by considering:
o How well risk identification procedures are carried
o How well risks are managed on an ongoing basis
o Limits set for retained risks, how limits are adhered to and consequences or actions taken when limits not met
o Execution of RM process
What are extreme events?
Low frequency, high impact events that can seriously affect org’s financial health
How does S&P assess extreme event management
- S&P looks for evidence of:
o Org considers different events e.g., terrorism, natural disasters …
And adopts appropriate way to measure impact (reputation, liquidity, financial strength)
o May look at stress testing and scenario analysis
o Early warning-indicators and cat insurance can be risk mitigators
o “Post-mortem” analyses of problems and risk mitigators that feeds into contingency plans