Brehm CH1

Question 1

Definition of Enterprise Risk Management (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

Risks that insurers faces:

Answer 2

1. Insurance hazard risk (the risk assumed by insurer in exchange for a premium.)
   Underwriting risk (risk due to non-cat losses from current exposures)
   Accumulation/Cat risk (risk due to cat losses from current exposures)
   Reserve deterioration risk (risk due to losses from past exposures)
2. Financial risk (risk in the insurer’s asset portfolio related to volatility in interest rates, foreign exchange rates, equity prices, credit quality and liquidity
3. Operational Risk (execution risks of the company)
4. Strategic risk (making the wrong or right strategic choices)

Question 3

ERM Process

Answer 3

1. Diagnose (conduct a risk assessment to determine material risks that exceed a company-defined threshold)
2. Analytical process (critical risks are modeled to the extent possible)
3. Implement (Implement various activities to manage the risks)
4. Monitor (monitor the actual outcomes of the plans implemented)

Question 4

Traditional forms of risk management

Answer 4

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
5. Retention, and assumption internally, or some or all of the risk

Question 4

How modeling can help the insurer with important management functions and strategic decisions:

Answer 4

1. Determine capital needed to support risk, maintain ratings
2. Identifying the sources of significant risk and 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 5

Characteristics of a good enterprise risk model

Answer 5

1. Show the balance between risk and reward from different strategies
2. Recognizes and reflects its own inevitable imperfection
3. Reflects the relative importance of various risks to business decisions
4. Include mathematical techniques to reflect the relationships among risks
5. Modelers have a deep knowledge of the fundamentals of those risks
6. Modelers have a trusted relationship with senior management of the company

Question 6

Examples of Underwriting risks

Answer 6

1. Loss frequency and severity distributions
2. Pricing risk
3. Parameter risk
4. Catastrophe modeling uncertainty

Question 7

What is reserving risk?

Answer 7

This refers to the risk of reserves developing other than as anticipated

Question 8

Sources of dependency:

Answer 8

1. Inflation rates, interest rates, equity values, etc, are correlated and should be modeled in macroeconomic model
2. Underwriting cycles, insurance loss trends, and reserve development are correlate across lines of business and with each other
3. Cats and other events risks are often correlated across LOB

Question 9

Capital requirement

Answer 9

Maintaining sufficient capital to:
1. sustain current underwriting
2. Provide for adverse reserve changes
3. Provide for declines in assets
4. Support growth
5. Satisfy regulators, rating agencies, and shareholders

Question 10

Common approaches for setting capital requirement

Answer 10

1. Maintaining sufficient capital so that the probability of default is remote.
2. Maintaining sufficient capital to maximize the insurer’s franchise value
   3.Maintaining sufficient capital to continue to service renewals.
3. Maintaining sufficient capital so that the insurer not only survives a major cat but thrives in its aftermath