CH:26 Risk Identification and classification

Question 1

What are risk identification techniques?

Answer 1

• Use risk classification
• techniques from project management
• risk checklist
• experience from experts and consultants or staff who have joined recently from similar organisations

Question 2

What is the 6 main risk categories?

Answer 2

• Market risk
• Credit risk
• Liquidity risk
• Business risk
• Operational risk
• External risk

Question 3

List the 3 divisions of market risk

Answer 3

• consequences of changes in the asset values
• consequences of investment market value changes on liabilities
• consequences of a provider not matching asset and liability cashflows

Question 4

What can cause a change in Asset value

Answer 4

• changes in the market value of equities and property
• changes in interest and inflation rates - primarily affect value of fixed interest and index-linked securities

Question 5

Why is a perfect match (asset to liability) almost impossible?

Answer 5

• not a wide range of assets - unusual to find an asset with a long duration
• liabilities uncertain in amount and timing
• liabilities may include options and hence have uncertain cashflows after option date
• liabilities may include discretionary benefits
• cost of maintaining a fully matched portfolio

Question 6

What are the business risks of financial product providers?

Answer 6

• underwriting risk
• insurance risk (uncertainty relating to claim rates and amounts)
• financing risk ( financing of projects or other activities)
• exposure risk (relations to amount of business sold or retained)

Question 7

Where can operational risk arise from?

Answer 7

• inadequate or failed processes, people or systems
• conduct risk (ex, mis-selling, interest rate manipulation)
• dominance of a single individual over the running of the business
• reliance on third parties to carry out various functions
• failure of plans to recover from an external event

Question 8

How can climate risk be catergorised?

Answer 8

• Physical - arising from the first-order effects of environmental changes
• Transition - arising from economic, political and market changes eg. reduced fossil fuel consumption
• Liability - relating to compensation claims due to the impacts of climate change