Brehm Ch4

Question 1

Types of Operational Risk

Answer 1

1. Internal Fraud (Stealing info)
2. External Fraud (Claims fraud)
3. Workplace safety
4. Clients
5. Damage to physical assets (Vandalism)
6. Business Disruption/System Failure (processing sys down)
7. Process Management

Question 2

Agency Theory Goals

Answer 2

1. Align management and owner interests
2. Understand impacts of potential divergence

Question 3

Control Self-Assessment

Answer 3

Evaluate effectiveness of internal controls

Question 4

Types of Key Risk Indicators

Answer 4

-Production (retention, hit ratio)
-Internal controls (audit results)
-Staffing (turnover, training)
-Claims (freq/sev)

Question 5

Types of Strategic Risk

Answer 5

1. Industry
2. Technology (advancement)
3. Brand (Price, service)
4. Competitor
5. Customer
6. Project (M&A can destroy value)
7. Stagnation (Respond poorly to UW cycle)

Question 6

Pros of Scenario Planning (over traditional)

Answer 6

1. Think responses beforehand (saves time)
2. More flexible planning

Advanced: ERM models

Question 7

Definition of Operational Risk

Answer 7

Risk due to failure of people, processes, systems
or due to external events

includes legal
excludes reputational, strategic, systematic

Question 8

4 Aspects of Effective Cycle Management

Answer 8

Intellectual Property (keep talent)
Underwriter Incentives (flexible incentive plans)
Market Overreaction (to UW cycle, better manage)
Owner Education (understand when diverge from peers)