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Exam 7 > Brehm #1 > Flashcards

Brehm #1 Flashcards

1
Q

ERM definition

A

identifying critical risks,
quantifying their impacts, and
implementing strategies to maximize value

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2
Q

Risks included in ERM analysis (2)

A
  1. enterprise-wide risks
  2. material risks
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3
Q

Main categories of risk facing insurers (4)

A
  1. insurance hazard risk
  2. financial (asset) risk
  3. operational risk
  4. strategic risk
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4
Q

Sub-categories of insurance hazard risk and associated exposures (3)

A
  1. UW - risk of non-cat losses from current exposures
  2. accumulation/cat - risk of cat losses from current exposures
  3. reserve deterioration - risk of losses from past exposures
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5
Q

Insurance hazard risk

A

risk assumed by insurer in exchange for premium

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6
Q

Financial (asset) risk (5 sources)

A

risk in asset portfolio due to volatility in:

  • interest rates
  • foreign exchange rates
  • equity prices
  • credit quality
  • liquidity
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7
Q

Operational risk and examples

A

risk associated w/execution of company’s business

  • IT systems
  • policy service systems
  • people
  • processes
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8
Q

Strategic risk

A

risk of making the right or wrong strategic choices, refusing to choose, OR failing to recognize that choices need to be made

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9
Q

Stages of ERM process (4)

A
  1. diagnose - initial risk assessment
  2. analyze - quantify critical risks using probability distributions of potential outcomes
  3. implement - avoidance, reduction, mitigation, elimination, retention
  4. monitor - actual vs. expected results
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10
Q

Essential elements of an enterprise risk model (4)

A
  1. UW risk
  2. reserving risk
  3. asset risk
  4. dependencies (correlations)
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11
Q

Components of UW risk in an enterprise risk model (5)

A
  1. loss frequency
  2. loss severity
  3. pricing risk
  4. parameter risk
  5. cat modeling uncertainty
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12
Q

Pricing risk definition (UW risk - enterprise risk model)

A

instability in UW results arising from variation in premium or losses (can come from mis-estimating projected losses or market pressures)

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13
Q

Components of parameter risk (UW risk in enterprise risk model - 4)

A
  1. estimation risk
  2. projection risk
  3. event risk
  4. systematic risk - *all parameter risk is systematic
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14
Q

Definition of parameter risk (UW risk)

A

risk that parameter estimates are incorrect

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15
Q

Definition of parameter projection risk in enterprise risk models and examples (3)

A

changes over time and uncertainty in projection of those changes

ex:
1. frequency trend
2. severity trend
3. loss development

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16
Q

Definition of event risk in enterprise risk models and examples (5)

A

when there is a causal link between a large event and losses to insurer—out of insurer control

ex:
1. class-action lawsuits
2. latent exposures (asbestos)
3. regulatory
4. new cause of loss discovered that was previously uncovered (construction defects)
5. new market entrant reduces rates to grab market share

17
Q

Definition of cat modeling uncertainty in enterprise risk models

A

uncertainty in probability of event and amount of insured damage

18
Q

Definition of reserving risk in enterprise risk models and impacts (2)

A

risk of reserves developing other than as anticipated

impacts:
1. amount of required capital
2. length of time capital must be held

19
Q

Common capital requirements (5)

A
  1. default avoidance - hold enough capital that probability of default is remote
  2. maintain financial ratings
  3. continue to service renewals (which are more profitable)
  4. not only survive a major cat event, but thrive in aftermath
  5. maximize insurer’s franchise value
20
Q

Traditional risk management techniques (5)

A
  1. avoidance
  2. reduction
  3. mitigation
  4. elimination
  5. retention
21
Q

Uses for enterprise risk modeling (5)

A
  1. Determine capital needs
  2. Set reinsurance strategies
  3. Plan growth
  4. Manage asset mix
  5. Value companies for M&A
22
Q

Definition of parameter estimation risk in enterprise risk models (UW risk)

A

risk that parameters are incorrect

can be reduced with more or better quality data but never eliminated

23
Q

Examples of Dependencies (4)

A
  1. macroeconomic conditions (inflation)
  2. UW cycles
  3. CATs that cross lines of business (e.g. auto & property)
  4. Extreme events (2008 financial crisis)

Exam 7 (20 decks)

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