Chapter 18: Risk management and controls

Question 1

The main categories of risk: (6)

Answer 1

1. Credit and counterparty risk
2. Market risk
3. Liquidity risk
4. Operational risk
5. Insurance risk
6. Group risk

Question 2

This chapter includes some specific examples of risk and risk management techniques of particular importance to a South African life insurance company. These include: (8)

Answer 2

1. Unit pricing risks
2. Reinsurance
3. Underwriting
4. Longevity and mortality projections
5. Longevity hedging
6. HIV and AIDs
7. Group risk
8. Other controls

Question 3

Chapter 5 Part 1 of the Insurance Act (2017):

Answer 3

Chapter 5 Part 1 of the Insurance Act (2017) requires companies to adopt, implement and maintain and effective governance and risk management framework.

Question 4

In particular, Chapter 5 Part 1 of the Insurance Act (2017), requires the following aspects to be in place for a company to demonstrate sound risk management: (5)

Answer 4

1. Good corporate governance
2. Sound risk management procedures and models
3. Adequate control functions
4. Independent audit and monitoring functions
5. Adequate disclosure and reporting to various stakeholders.

Question 5

Section B of Attachment 3 to GOI 2

A risk committee must perform at least the following functions: (8)

Answer 5

1. Assist the board of directors in developing its risk management strategy.
2. Assist the board of directors in evaluating the adequacy and effectiveness of the risk management system.
3. Assist the board of directors in identifying any build-up and concentration of the various risks to which the insurer is exposed.
4. Assist the board of directors in identifying and monitoring all material risks to ensure that its decision-making capability and accuracy of its reporting is adequately maintained.
5. Facilitate and promote communication regarding the matters referred to in 3 above, or any related matters, between the board of directors and senior management.
6. Facilitate and ensure the appropriate segmentation of duties of the risk management function from operational business line responsibilities and ensure that the segregation is observed.
7. Introduce measures to enhance the adequacy and effectiveness of the risk management system.
8. Oversee the monitoring of risk management on an enterprise-wide2 and individual business unit basis.

Question 6

List the policies required as a minimum under GOI 3 Risk management and Internal controls for Insurers: (14)

Answer 6

1. asset-liability management
2. capital management
3. concentration
4. credit
5. fitness and propriety
6. information technology
7. insurance fraud
8. investment
9. liquidity management
10. operational
11. outsourcing
12. reinsurance and other forms of risk transfer
13. remuneration
14. underwriting

Question 7

In monitoring the credit risk to which a firm is exposed, the controls will take account of the following: (6)

Answer 7

1. Counterpart exposure, which is the amount a firm would lose if a counterparty were to fail to meet its obligations.
2. Asset exposure, which is the amount a firm would lose if an asset or class of assets were to yield less than expected returns or otherwise reduce significantly reduce in value.
3. Adequacy of diversification in spreading the credit risk
4. Likelihood of default
5. Expected loss in the event of default
6. Exposure period

Question 8

Examples of operational risk exposures that the systems and controls are meant to address include: (5)

Answer 8

1. Internal and external fraud
2. Failure to comply with employment law or meet workplace safety standards.
3. Damage to physical assets
4. Business disruptions and system failures
5. Transactional processing failures