Chapter 2

Question 1

Risk identification and procedure in practice

Answer 1

• Preparation of check lists with all conceivable risks and potential losses that can threaten a firm
• Financial statement method: Each balance sheet position is tested separately for risks
• Claims statistics
• Institutionalisation of hazard risk: Analysis of circumstances that lead to claims, even if they have
  not occurred yet

Question 2

How is derived Solvency Capital Requirement (Solvency II)?

Answer 2

SCR is derived on the basis of a Value-at-Risk calculation with a safety level of 1-α = 99.5%

Question 3

Definition of Risk Bearing Capital at t=0

Answer 3

RBC at time t = 0 is defined as the

difference between the market value of the assets and the best estimate (i.e., present value) of the liabilities

Question 4

Risk neutrality

Answer 4

You just care about the expected value

Question 5

Risk aversion

Answer 5

minimize risk measure for a given expected value

Question 6

Risk seeking

Answer 6

maximize risk measure for a given expected value

Question 7

How to value risky payoff?

Answer 7

If it is possible to replicate the risky payoff with traded assets the price of the replication portfoliois the arbitrage-free price of the risky payoff.
If it’s not possible the price depends on individual preferences

Question 8

Rationality of RMI

Answer 8

1 - RMI can make sense for economic subjects who have a comparative disadvantage in risk taking
2 - transaction costs of RMI are lower tha expected costs of insolvency
3 - FIscal reason: insurance costs are tax deductible
4 - Comparative advantages of insurers in claims handling
5 - Insurers can explicitly monitor loss mitigation measures. They can reduce the risk seeking bvehavior of managers