Brehm Ch. 1 Flashcards
ERM definition
Process of systematically and comprehensively identifying critical risks, quantifying their impacts, and implementing strategies to maximize value
Four aspects of ERM
Regular process, risks should be considered on an enterprise basis, focuses on risks of significant impact, risks must be quantified as best as possible
Four risks an insurer faces
Insurance hazard (UW, accumulation/CAT, and reserve), Asset (volatility in rates, liquidity), Operational, Strategic
Four steps in ERM process
Diagnose, Analyze, Implement, Monitor
Three characteristics of good enterprise risk model
Shows balance between risk and reward for each strategy, reflects relative importance of various risks, includes mathematical techniques to reflect relationships among risks
What may happen if a firm employs a weak ERM
Certain aspects of risk may be exaggerated or underestimated
Four types of parameter risk
Estimation, Projection, Event, Systematic
An example of event risk
Latent exposures (asbestos)
An example of systematic risk
Inflation
Three sources of uncertainty in CAT models
Probabilities of various events, amount of insured damage caused by each event, data quality
Key aspect of asset modeling
Modeling scenarios consistent with historical patterns
Four reasons for holding sufficient capital
Sustain current UW, provide for adverse reserve changes and decline in assets, support growth, satisfy regulators, rating agencies, and shareholders
Four common approaches for setting capital requirements
Probability of default is remote, to maximize franchise value, to continue to service renewals, so that insurer can not only survive but thrive after a major CAT
