Brehm CH 1

Question 1

What’s the definition of ERM?

Answer 1

The process of systematically and comprehensively identifying critical risks, quantifying their impacts and implementing integrated strategies to maximize enterprise value

Question 2

What are some key aspects of the ERM definition?

Answer 2

(1) Effective ERM programs are a regular process, not a one-time event
(2) Risks should be considered on an enterprise basis
(3) Focus on material risks
(4) Risk is not just adverse deviations from expectations
(5) Quantify to the extent possible
(6) Implement strats to avoid, mitigate or exploit big risk factors
(7) to maximize value, tradeoff risk and return

Question 3

What are the components of insurance hazard risk?

Answer 3

split between in-force exposure (non-cat and cat) and past exposure
(1) Underwriting
(2) Accumulation / Cat
(3) Reserve deterioration

Question 4

What are the components of financial risk?

Answer 4

volatility in interest rates, foreign exchange rates, equity prices, credit quality, and liquidity

Question 5

What is operational risk?

Answer 5

execution risks of the company => things dont always go as planned

Question 6

What is strategic risk?

Answer 6

making choices => right or wrong decisions
refusing to make decisions or failing to recognize choices need to be made
threats to company value from actions

Question 7

What is Kent Miller’s categorization of uncertainties for a firm?

Answer 7

1. General environment
   a. Political uncertainties (democratic changes, war, revolution … )
   b. Government policy (fiscal, monetary changes, regulation … )
   c. Macroeconomic (inflation, interest rates … )
   d. Social (terrorism … )
   e. Natural (hurricane, earthquake, flood, drought…)
2. Industry
   a. Input market (supply, quality … )
   b. Product market (demand … )
   c. Competitive uncertainties (new entrants, rivalry … )
3. Firm specific
   a. Operating (labor, supply, production … )
   b. Liability (products, pollution, employment … )
   c.R&D
   d. Credit
   e. Behavioral

Question 8

What are 5 traditional forms of RM?

Answer 8

1. Avoidance of the risk
2. Reduction in the chance of occurrence
3. Mitigation of the effect of given occurrence
4. Elimination or transference of the consequences, and/or
5. Retention, and assumption internally, of (by design or by default) some or
   all of the risk.

Question 9

What are 6 ways risk modeling can help a firm?

Answer 9

(1) Determining capital needed to support risk, maintain ratings, etc.
(2) Identifying the sources of significant risk and the cost of capital to support them
(3) Setting reinsurance strategies
(4) Planning growth
(5) Managing asset mix
(6) Valuing companies for mergers and acquisitions

Question 10

What will a good enterprise risk model do?

Answer 10

As realistically as possible, show the balance between risk and return of a range of strategies
recognizes and reflects its imperfection

Question 11

What are 4 elements that differentiate model quality?

Answer 11

(1) The model reflects the relative importance of various risks to business decisions.
(2) The modelers have a deep knowledge of the fundamentals of those risks.
(3) The model includes mathematical techniques to reflect the relationships among risks (dependencies).
(4) The modelers have a trusted relationship with senior management of the company.

Question 12

What are 4 aspects of UW risks?

Answer 12

Loss frequency and severity distributions
Pricing risk (UW cycle contributes to this)
Parameter risk => estimation, projection, event, and systematic risk
projection risk = uncertainty in trends / CDFs
Cat modeling uncertainty

Question 13

Why is default not the most germane reference point in setting capital?

Answer 13

default is only about protecting policyholders
to protect shareholder value, need to avoid significant partial losses of capital
damage to franchise value needs to be considered (rating downgrade => downward spiral)
amount of capital to hit rating downgrade more relevant reference point
also very tough to estimate extreme values, focus on points closer to the mean

Question 14

What does an insurers franchise value include?

Answer 14

customer base, agency relationships, reputation, infrastructure and expertise

Question 15

What are 4 steps in ERM?

Answer 15

(1) Diagnose => High-level assessment to identify critical risks
(2) Analyze => Model critical risks where possible and incorporate dependencies
(3) Implement => Activities to manage risk such as avoidance, mitigating effects, etc
(4) Monitor the plan compared to expectations and update/improve continually