Chapter 29: Risk measurement & reporting

Question 1

Why risk reporting is important NAQCIAP:

Answer 1

New and changing of risks identified
Appropriate capital requirements set of risks
Quantify risks faced
Implement and monitor proper control systems
Interaction between risks
Assess proper risk allocation by business units (ERM)
Pricing done correctly for risk

Question 2

When quantifying the capital required for each retained risk, consider TICL P:

Answer 2

The term of the risk exposure (a year or full business run off)
Correlation allowances
Interdependencies of risk
Low likelihood high impact risks (especially operational risks)
Past data’s credibility

Question 3

Limit scope of modelling to reduce cost and time consumption TIVO/ TLC:

Answer 3

Restrict time horizon tested
Limit number of stochastically modelled variables
Some runs with single stochastic variables
One deterministic run with all variables on worst case scenario

Restirict the time horizon of the model
limit the number of variables modelled stochastically and use deterministic approach for others
carry out a number of runs with a different single stochastic variable and then do a single deterministic run with all variables for a worst case scenario

Question 4

Scenario analysis GroP ACTS / GroDe CaRuT

Answer 4

Group risk exposures into broad categories - input from several senior managers
Develop Plausible adverse scenario for each category - ideas!!
Assumptions set for the risk factors of the scenario
Calculate consequences based on certain assumptions - ideas!!
Total cost is financial cost of all risks in relevant scenario
Several different scenarios Run - one for each group risk exposure
/
Group risk exposures into broad categories - input from several senior managers
Develop Plausible adverse scenario for each category - ideas!!
- Assumptions set for the risk factors of the scenario
Calculate consequences based on certain assumptions - ideas!!
Run several different scenarios - one for each group risk exposure
Total cost is financial cost of all risks in relevant scenario

Question 5

Probabilistic Risk measures: VLATD / VESP NoD

Answer 5

VaR
Liability risk - measured by analysis of experience vs. expected
Asset risk - Active risk measure (forward/backward looking tracking error)
Tail VaR
Deviation

VaR (likelihood of under performing against a benchmark)
Expected shortfall (Expected value of the loss exceeding VaR)
Sensitivity approach (Factor or Scenario variation)
Probability of ruin (Prob of insolvency over a time)
Notional approach (Broad brush ex. Risk weighting, Basel III)
Deviation (variance + historic/forward looking tracking error)

Question 6

Purpose of a stress test VICSIR

Answer 6

Volatilities of results checked
Identify weak areas – where high volatility and correlation exists
Correlations between risks checked and held consistent
Sensitivity of certain risk factors
Impact of market turmoil on parameters
Reactions of rest of business on stress scenario: Ideas!

Question 7

The pros and cons of VaR aBUCS DUSA

Answer 7

Applicable to all risk types  
Benchmark can be set from its outcome
Units are understandable 
Comparable between various risk sources  
Simple expression  

Distribution of losses > than VaR not considered
Underestimation of fat tailed distributions
Sensitive to choices of data, assumptions and parameters
Addition of risks won’t increase the overall risk exposure

Question 8

The contents of a risk register (ICoRP DRAM COCK):

Answer 8

Impact
Correlation
Risk score to compare risks with each other
Probability

Extension of risk register:
Diversified risk  
Retained risk  
Avoided risk  
Mitigated risk  
Controls measures  
Owner of the risk 
Concentration of risks  
Key strategic risks identified

Question 9

The utility of risk reports IQ DEMAAAADe / IQ DEM CRIPR (Eintlik redundant, alles hierin kom in NAQIAP voor)

Answer 9

Identifying new risks
Quantifying the impact of individual risks
Determining appropriate control systems for specific risks
ERM - Is risk allocated actually taken on
Monitoring the effectiveness of existing control systems for specific risks
Assessing changes to risks faced
Assessing the interaction between risks
Assisting with pricing of risk
Assisting with reserving for risk
Determining capital requirements;

Identifying new risks
Quantifying the impact of individual risks
Determining appropriate control systems for specific risks
ERM - Is risk allocated actually taken on
Monitoring the effectiveness of existing control systems for specific risks
Risks faced assessed
Interaction between risks assessed
Pricing of risk
Reserving for risk
Requirements of capital determined

Question 10

How to do a stress test:

Answer 10

Subject portfolio to extreme market movements ( In the case of testing adverse claims experiences or solvency levels, subject portfolio to relevant extremes such)
- This can be done by for changing assets and liabilites to extreme low or high values, making new business volumes extremely high etc. Or by changing key assumptions such as the claim rate, interest rate, inflatiion

correlations should be considered carefully. This may lead to the need to do stress scenario testing

Two types of stress testing:
Identify weak areas in the portfolio
gauge the impact of major market turmoil