Chapter 28: Accepting risk

Question 1

Risk appetite

Answer 1

a statement of the maximum amount and types of risks that a person or organisation is prepared to take on in order to meet their objectives

Question 2

Risk profile

Answer 2

this is a complete description of the risk exposures of an organisation, including risks that might emerge in the future and that will affect the current business of the organisation

Question 3

Risk limits

Answer 3

A component of risk capacity

This is a set of guidelines that set limits on the actions that might be taken today.
If the risk limits are adhered to, then each individual unit of the business should be deemed to be working within its permited risk tolerance.

Question 4

Risk capacity

Answer 4

this is the volume of risk that a business can take on as measured by some consistent measure such as economic capital.
If there is spare capacity, then it might be possible to take postive actions that add economic value to the organisation without breaching existing tolerance or existing capacity.

Question 5

characteristics for a risk to be insurable

Answer 5

• The policyholder must have an interest in the risk being insured.
• a risk must be of a financial and a reasonably quantifiable nature
• the amount payable in the event of a claim must bear a relationship with the financial loss incurred

Question 6

what are the desirable criteria for insurable risks?

Answer 6

• individual risk events should be independent of each other.
• The probability of the event should be relatively small.
• Large numbers of potentially similar risks should be pooled together in order to reduce the variance and hence achieve more certainty
• there should be an ultimate limit on the value of the liability taken on by the insurer
• moral hazards should be eliminated as far as possible because these are difficult to quantify.
• there should be sufficient existing statistical data/information to enable the insurer to estimate the extent of the risk and its likelihood of occurrence