Accepting Risk

Question 1

A risk is insurable if

Answer 1

Interest in the risk
Financially and quantifiable nature
Claim amount related to financial loss

Question 2

Desirable criteria for insurable risk

Answer 2

Independent risks
Small probability of occurring
Risk pooling to reduce variance
Limited ultimate liability
Eliminated moral hazard
Sufficient data

Question 3

Define risk appetite

Answer 3

being a statement of the maximum amount
and types of risks that an entity is prepared to take on
in order to meet its objectives

Question 4

list ways of how the board of a company may express their risk appetites

Answer 4

can be expressed by means of both quantitiative and qualitative statements

quantitative statements may refer to an organisation’s:
solvency level
(staying above a certain threshold with a certain probability)
(probability of ruin may be relevant)
credit rating
(rating not reducing beyond a certain level with a certain level of confidence)
earnings and dividend paying ability
(earnings volatility not exceeding X)
Economic value
(not losing a certain amount of economic value with a given probability)
in practice many appetites will be a combination of the features above
(since the board may need to address the needs of different stakeholders)
risk appetite might be expressed so as to maximise economic value subject to for example solvency deterioration constraints

qualitative statements refer to risks that the company chooses to avoid altogether
(not doing busienss with anyone that has criminal records)
(or avoid doing busienss in certain areas with certain organisations)

Question 5

list factors influencing the risk appetite of a company

Answer 5

size

period of time it has been in operation

level of capital available

existence of parent companies

corporate structure

pervious experiences of board members

attitude to risk of owners

company’s preference to maintain a certain credit rating

nature of the products being sold