Chapter 26: Risk Identification and classification Flashcards
The principles of good lending relate to the: (CASPAR)
“Cannons of good lending”
Character and ability of borrower(known, competent, trustworthy, references?)
Amount (reasonable for purpose?)
Security (nature of transaction, covenant, market circumstances, security available)
Purpose or borrowing (risks associated with where the monies will be used)
Ability to repay (certain source of repayment? Any margins of safety?)
Risk vs. reward (is reward appropriate to risk level, has due diligence been done)
Investment risks (DRUMOLITE WE CUP) actually part of market risk:
Default Reinvestment Uncertainty over timing/amount of return Mismatching of A/L Opportunity cost of capital Lack of appreciation from beneficiaries/ Liquidity risk Inflation (income and capital proceeds) Taxation Expenses
Withdrawal risk (withdrawals hight, lose economies of scale) Equity risk
Clients expectation not met
Under performance to benchmark
Property risk
Risk identification:
DR RUB
Desktop analysis to supplement the results from brainstorming session
Risk analysis at high level / High level prelim risk analysis
- Determines if the project isnt too risky
Risk register/matrix
Upside/downside, likely/unlikely - Identification or risks
Brainstorm with experts (MILEP), senior internal and external
- Discuss risks and their interdependencies
- Place broad evaluation on each risk
- Generate intitial mitigation options
Brainstorming with experts should yield:
MILEP
Mitigation options Interdependent risks Long term strategic thinking Evaluate risks: frequency, consequences Project risk identification – likely, up/downside
Business Risk for insurers BREW COUNt
Business mix and volumes Reinsurance Expenses Withdrawals Claims Options and guarantees Underwriting - Insufficient premium charged for the risk taken on by the company - Underwriting insufficient and hence more risk taken on than what was priced for New business strain
Risks in Life and General insurance
RISC LIFE DROWN CATS MUn
Reinsurance/ Reputational
Investment/ Reinvestment risk
Systematic risk
Competition risk
Liquidity risks
Inflation (medical, expense and price)
Fraud (Operational risks)
Expenses
Data (quality and amount)/Model and parameter risk
Rates (Mortality, Unemployment, morbidity)
Options and Guarantees
Withdrawals
New business(vol, mix and strain) risk
Credit risk/ failure of third parties
Aggregation of risk/Concentration risk
Tax changes
Selection (Anti Selection, Moral Hazard)
Marketing/ Market risk
Underwriting risk
Sources of operational risk DIRH KCOFF/ MIT CoD HuISF
Dominance Reliance on third parties Internal process failures Human error Key person risk Cyber crime Outsourcing Fraud Failure of plans to recover from external risks /
Model/parameter/data risk IT risk (Security and failure) Third party reliance
Compliance/legal deficiencies
Dominance risk
Human error
Internal process (investment strategy, product design, marketing risk)
Systems failure (Claims control, admin, management control systems)
Fraud
Define Liquidity risk EEM:
The risk that a company, although solvent, does not have the financial resources to meet its liabilities as they fall due or can secure these resources at excessive cost. Usually caused by a sudden surge in liability withdrawals
Three definitions: EEM
Not enough liquid assets to meet liabilities as they fall due
Significant expenses associated with liquidating assets
Market liquidity where the market will not be able to handle the volume of an asset at the time that it needs to be liquidated without compromising the price.
Market risk definition ALM
Market risks are the risks related to changes in investment market values or other features (interest, inflation, exchange rate) related to the investment markets. Divided in: Asset changes Liability changes Matched position changes
Business risk definition
Risk specific to the business undertaken
Also refers to all the risks underwritten by insurance companies.
Operational risk PPES
The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
Systematic risk vs Diversifiable risk
Systematic risk is the risk that affects an entire financial market or system.
Diversifiable risk arises from an individual component of a financial market or system.
It is not possible to avoid systematic risk through diverisification. It is possible not to take on diversifiable risk since you can diversify it away.
