Brehm Flashcards
Enterprise Risk Management
it’s the process of systematically and comprehensively identifying critical risks, quantifying their impacts, and implementing integrated strategies to maximize enterprise value
Key aspects of ERM
An effective ERM program should be a regular process
Should consider risks on an enterprise-wide basis
Focus on risks that represent a material impact to the value of the firm
Risk can be positive or negative, it’s the fact that actual outcomes vary from expected
Risks must be quantified where possible, including correlations among risks
Create strategies to avoid, mitigate, or exploit risk factors
Types of insurance company Risk Factors
Insurance Hazard Risk - Risk assumed by insurer
- underwriting (non-cat)
- accumulation/cat-risk
- reserve deterioration <- from past exposures
Financial Risk - Risk to asset portfolio due to volatility in forex rates, equity prices, credit quality, liquidity
Operational Risks - Risks in the operation/execution of the company; the actions the company takes
Strategic Risks - the risks of choosing the wrong plan
Enterprise Risk Management Process
Diagnose - High-level risk assessment of risk factors that pose a potentially serious threat to the firm
-> General environment risks
-> industry risks
-> Firm-specific risks
Analyze - Quantify risks with probability distribution of potential outcomes. Include correlations.
Implement - Avoidance, reduction, mitigation, elimination/transfer, or retain/assume risks
Monitor - monitor results vs expectations, update plans
Enterprise Risk Modeling: helps with the following strategic decisions
Determining capital needed to support risk or maintain rating
Identifying sources of significant risks
Deciding on reinsurance strategies
Planning growth
Managing asset mix
Valuing companies for M&A
Most important elements for model quality
Model reflects relative important of different risks to business decisions
Modelers have a deep knowledge of the risk fundamentals
Model incorporates the dependencies between different risks
Modelers have a trusted relationship with senior management
“Essential elements” of an enterprise risk model
Underwriting risk
Reserving risk
Asset risk
Dependencies (correlation)
Underwriting Risk
Loss Freq & Sev Distribution
Pricing Risk
Parameter Risk
Cat Modeling Uncertainty
Parameter Risk
Estimation Risk
Projection Risk
Event Risk
Systematic Risk
Reserve Risk
Risk that reserves develop differently than expected
Reserve uncertainty impacts the amount of required capital and time that capital must be held
A model can understate both a reserve estimate and reserve uncertainty.
-> we need a model of reserve uncertainty in an enterprise risk model
Asset Risk
Model asset risk by generating probabilistic scenarios based on historical patterns and testing the insurer’s strategy against the scenarios, taking into account the scenario likelihood
Model should account for:
Bonds, Equities, Forex
Sources of Dependencies
Simultaneous impact of macroeconomic conditions on multiple risks
inflation impacts both uw losses and loss development
Dependencies that impact multiple lines of business
UW cycles, loss trends, reserve developments, catastrophes (Event risk)
Modeling Dependency
Use copulas to incorporate dependency if there’s higher correlation in the tail
Correlation through a multivariate normal distribution has low tail dependency
