Chapter 21 - Analysis of other risks

Question 1

Types of liquidity risk

Answer 1

Funding liquidity risk - risk of money markets not being able to supply funding to business when required

Market liquidity risk - lack of capacity in the market to handle asset transactions at the time when the deal is required

Question 2

Methods of assessing liquidity risk

Answer 2

Cash outflows and inflows: Project - revenues/incomes, proceeds of sale of assets, drawings upon other sources of liquidity

Liquidity analysis: IR DILDO

Interest rates
Reinsurance contract loss
Distribution channel
Impaired capital markets
Large single losses
Downgraded credit rating
Operational loss

Question 3

Types of demographic risk

Answer 3

Level/underwriting risk

Reserving risk:
Volatility risk
Catastrophe
Trend/cycle risk

Question 4

Ways of determining underlying level of mortality

Answer 4

Experience rating - initial mortality rate, central mortality rates, actual deaths in portfolio

Risk rating - Model homogenous groups on risk factors, GLMs or survivor models, postcode rating, market/survey info helpful

Credibility weighting - combine risk rating and experience rating

Question 5

Assessing volatility risk

Answer 5

Done probabilistically or stochasticlaly, assuming underlying statistical process

Poisson MLE often used

Question 6

Assessing catastrophe risk

Answer 6

Best modelled using scenario analysis

Copulas can be used, where multiple sources of mortality have own probability distribution

Mortality reduction can be ignored