Brehm Ch1 Flashcards
Enterprise Risk Management
The process of systematically and comprehensively:
-identifying critical risks
-quantifying their impacts
-implementing strategies to max enterprise value
Insurers face what risks?
FIOS
-Insurance hazard (risk assumed in exchange for premium)
-UW
-CAT
-Reserve deterioration
-Financial/Asset (interest rates)
-Operational (IT systems)
-Strategic (making wrong choices)
ERM Process Steps
Diagnose
Analyze
Implement
Monitor
UW Risk components
Frequency/Severity distributions
Pricing risk (UW cycle)
Parameter risk
CAT model uncertainty
Reserving Risk
That will develop other than expected
Trad techniques deterministic
Stochastic methods help to understand variability
Asset Risk
Variability in asset values
Bonds, equities, real estate, exchange rates
Model scenarios consistent with historical patterns
Duration matching helps balance insurance and investment risk
Dependencies/Correlations in ERM modeling
- Interest rates, inflation, equity values
- UW cycles, loss trends, reserve dev
- CATS/event risks
Capital must be sufficient to…
-Sustain current UW
-Provide for adverse reserve changes
-Provide for declines in assets
-Support growth
-Satisfy regulators/shareholders
Common approaches for setting capital
-Prob of default remote (very conservative, difficult to model)
-Max franchise value
-Continue to service renewals
-Thrives in aftermath of a major CAT
Good ERM Model characteristics
-Shows balance of risk/reward for diff strategies
-Recognizes own imperfections
-Reflects relative importance of various risks to decisions
-Modelers have deep knowledge of fundamentals of each risk
-Modelers have trusted relationship with senior management
-Model reflects dependencies/correlations
-Model reflects uncertainty of outputs from other models (macro, CAT)
Uses of ERM Models
CRAG
-Determining capital
-Reinsurance strategy
-Asset mix
-Planning growth
Parameter Risk components
-Estimation risk (imperfect data)
-Projection risk (uncertainty in changes over time, trend/dev)
-Event risk (large event outside of control)
-Systematic risk (cannot diversify, e.g. inflation)
4 Forms of Traditional Risk Management
Risk avoidance
Risk mitigation
Risk transfer
Retain risk
