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ARM 54 > Ch. 4: Op, Fin & Strat Risk > Flashcards

Ch. 4: Op, Fin & Strat Risk Flashcards

1
Q

Six examples of strategies to mitigate people risk

A 
Recruitment
Selection
Training and development
Performance management
Incentives
Succession planning
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2
Q

Root cause (definition)

A

The event or circumstance that directly leads to an occurrence

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3
Q

Key risk indicator (KRI) (definition)

A

A financial or nonfinancial metric used to help define and measure potential losses

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4
Q

Exposure indicator (definition)

A

A metric used to identify risk inherent to an organization’s operations

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5
Q

Loss ratio (definition)

A

A ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses

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6
Q

Control indicator (definition)

A

A metric used to identify an organization’s management of risk

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7
Q

Nine examples of risk indicators for people risk

A 
Education
Experience
Staffing levels
Employee surveys
Customer service
Compensation and experience benchmarked to industry
Incentives such as bonuses
Authority levels
Management experience
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8
Q

Seven examples of risk indicators for process risk

A 
Quality score cards
Analysis of errors
Areas of increased activity or volume
Review of outcomes
Internal and extra review
Identification of areas of highest risk
Quality of internal audit procedures
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9
Q

Six examples of risk indicators for systems risk

A 
Benchmarks against industry standards
Internal and external review
Analysis to determine stress points and weaknesses
Identification of areas of highest risk
Testing
Monitoring
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10
Q

The three major types of financial risk

A

Market risk
Credit risk
Price risk

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11
Q

Risk optimization (definition)

A

A state whereby risk and return are balanced so that a maximum return is achieved for the level of risk accepted by an organization

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12
Q

Hedging (definition)

A

A financial transaction in which one asset is held to offset the risk associated with another asset

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13
Q

Systematic risk (definition)

A

Risk that is common to all securities of the same general class and that therefore cannot be eliminated by diversification

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14
Q

The five major categories of market risk

A 
Currency price risk
Interest rate risk
Commodity price risk
Equity price risk
Liquidity risk
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15
Q

Interest rate risk (definition)

A

The risk that a security’s future value will decline because of changes in interest rates

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16
Q

Swap (definition)

A

An agreement between two organizations to exchange payments based on changes in the value of an asset, yield, or index over a specific period

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17
Q

Cash matching (definition)

A

The process of matching an investment’s maturity rate with the amount of expected loss payments

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18
Q

Zero-coupon bond (definition)

A

A corporate bond that does not pay periodic interest income

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19
Q

Reinvestment risk (definition)

A

The risk that the rate at which periodic interest payments can be reinvested over the life of the investment will be unfavorable

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20
Q

Commodity price risk (definition)

A

The risk associated with the change in the prices of commodities that are necessary to an organization’s operations

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21
Q

Cash flow (definition)

A

Cash inflow minus cash outflow

22
Q

Commodity futures contract (definition)

A

A contract either to make or to accept delivery of a specified quantity of a commodity on a given date

23
Q

Equity price risk (definition)

A

The risk that changes in the price of a stock or another security will increase or decrease

24
Q

Call option (definition)

A

An option to buy a set amount of the underlying security at any time within a specified.

25
Q

Put option (definition)

A

An option giving the holder the right to sell a set amount of the underlying security at any time within a specified.

26
Q

The two types of credit risk

A

Firm-specific risk and systemic credit risk

27
Q

Price risk (definition)

A

The potential for a change in revenue or cost because of an increase or a decrease in the price of a product or an input

28
Q

Price risk has these two aspects for most organizations

A

The price charged for the organization’s products or services
The price of assets purchased or sold by an organization

29
Q

Earnings at risk (definition)

A

The maximum expected loss of earnings within a specific degree of confidence

30
Q

Value at risk (definition)

A

VaR measures the probability of the loss in an investment value exceeding a threshold level. It works within a short time horizon and is typically characterized by low probability.

31
Q

Three key benefits of Value at Risk as a risk measure

A

The potential loss associated with an investment decision can be quantified
Complex positions are expressed as a single figure
Loss is expressed in easily understood monetary terms

32
Q

The primary limitation of Value at Risk

A

It does not accurately measure the extent to which a loss might exceed the VaR threshold

33
Q

Conditional value at risk (definition)

A

A model to determine the likelihood of a loss given that the loss is greater than or equal to the VaR

34
Q

Monte Carlo simulation (definition)

A

A computerized statistical model that simulates the effects of various types of uncertainty

35
Q

Capital (definition)

A

The accumulated assets of a business or an owner’s equity in a business

36
Q

Risk capital (definition)

A

The level of capital required to provide a cushion against unexpected loss of economic value at a financial institution, usually within a confidence interval of 95%

37
Q

Equity capital (definition)

A

Preferred stock, surplus, common stock, undivided profits and capital reserves, and net unrealized holding gains (or losses) on securities that are not available for sale

38
Q

Leverage (definition)

A

The practice of using borrowed money to invest

39
Q

The three pillars of Basel II

A

Minimum capital requirements that address risk
Supervisory review
Market discipline

40
Q

Economic capital (definition)

A

A form of regulatory capital; an estimate of the amount of capital a firm needs to remain solvent at a given risk tolerance level

41
Q

How economic capital differs from other types of regulatory capital

A

Rather than being based on a formula, it is based on the fair (market) values of the firm’s assets and liabilities as well as their variability

42
Q

Generally accepted accounting principles (GAAP) (definition)

A

A common set of accounting standards and procedures used in the preparation of financial statements to ensure consistency of presentation and reported results

43
Q

Statutory accounting principles (SAP) (definition)

A

The accounting principles and practices that are prescribed or permitted by an insurer’s domiciliary state and that insurers must follow

44
Q

Market value surplus (definition)

A

The fair value of assets minus the fair value of liabilities

45
Q

Enterprise risk management (definition)

A

An approach to managing all of an organization’s key business risks and opportunities with the intent of maximizing shareholder value

46
Q

Four examples of key economic risk factors

A

Gross Domestic Product (GDP)
Inflation
Financial crises, including sovereign debt crises
International trade flows and restrictions

47
Q

Tariff (definition)

A

A tax that shields domestic producers from foreign competition

48
Q

Demographics (definition)

A

The statistical characteristics of human populations

49
Q

Political risk (definition)

A

Any action by a government that favors domestic over foreign organizations or poses a threat to foreign organizations

50
Q

A typical framework includes these four categories of operational risk

A

People
Process
Systems
External events

ARM 54 (5 decks)

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