Ch 8 - 14 Flashcards
1
Q
Three Lines of Defence
A
- Line Management, Business Units and Support Staff
a) Measure and manage risk with respect to appetite on daily basis. - CRO, risk management and compliance functions
b) Establish risk and compliance programs, policies, supporting and monitoring line management, reporting to board - Board of Directors and Audit Function
c) Governance of risk process, setting strategy, approving policies, ensuring effectiveness
2
Q
ERM Control Cycle
A
- Identify all risks consistently
- Assess with respect to appetite
- Manage/Treat
- Monitoring, review and reporting of risks, lossess and effectiveness of treatments/ext aud
- Modification (as env change)
3
Q
Risk Corporate strategy Improvements
A
- Sales Growth
- Product Choice (price)
- Distribution technique
- Target Markets
- Cost Management
- Asset Management
a) Which risks to embrace, which to mitigate
b) Which risky products undertaken
c) Degree and type risk transfer, hedging
d) Allocate capital efficiently
e) Manage Borrowing/Gearing Ratio
Examples, spreading distribution channels, geographically, method, multidisciplinary teams, outsourcing, horizon scanning, EWI
4
Q
Risk Policy
A
- Appetite - risk prepared to accept to attain objectives (depends on culture, obj, current business environment, current success, desired profile)
- Capacity - Upper bound, regulatory, legislative, capital availability, stakeholder preference
- Tolerance - Quantitative statements more detail with categories/business units broken down by RMF (solvency level, credit rating, volatility, dividends, economic cap)
- Limits - Day to day basis (remain within capacity - coherent)
- Profile - Description current/emerging
- Exposure - Max Loss
5
Q
Utility/Prospect Functions
A
Monotonically increasing and concave.
Prospect (risk seeking in losses)
Absolute RA = -uāā/u > 0
RRA = W*ARA
Quad: aW - 0.5W^2 (increasing)
Exp: -exp(-aW)/a (in RRA ~ ARA)
Power W^(1-a)/1-a or lnW (const RRA, DECAB)
