Chapter 3 - Types of Risk Flashcards
Why do we place risks into types and categories?
- To cope with complexity
- Understand risk better
- Increase effectiveness in dealing with risk
Name the 11 types of risk
- Speculative
- Pure
- Strategy
- Operational
- Market
- Credit
- Liquidity
- Business
- Insurance
- Repetitional
- Regulatory and Legal
What are the components of Corporate risks?
- Business Risk
- Strategic Risk
- Financial Risk
- Legal, Regulatory and Compliance Risk
How do business and corporate risk differ?
Corporate risk is more encompassing. Business risk is the probability of loss inherent in an organisations operations and environment.
What are strategic risks?
Associated with vision, mission and long term objectives
Define Financial Risks
Covers complex group of risks associated with the financing of business activities and specific financial transactions.
What makes up financial risks?
- Accuracy of financial reporting of business activity and profit or loss
- Valuation of properties, commodities, investments, debts, currency
- Market, liquidity and credit risk
What is systematic risk?
(Market risk); the risk of losses in trading positions due to movements of market prices.
What is credit risk?
risk that a counter-party will suffer real or perceived deterioration in financial strength or will be unable to pay amounts in full
Categories of credit risk
- Default risk
- Concentration risk
- Country risk
The running out of cash to meet financial obligations is called?
Liquidity risk
Legal risk/ contract risk is the
breach of contract both actual and alleged
Regulatory risk?
Associated with factors an organisation needs to consider due to the regulatory environment in which it operated
Failure to comply with laws and regulations is which type of risk?
Compliance risk
What is operational risk?
risk of loss resulting from inadequate or failed internal processes, people and systems or from external events
Components to control operational risk
- Staff resourcing
- Preventing fraud
- Workplace Health and Safety
How does outsourcing bring risks?
- Loss of control of the operation
- Less appreciation of the risk and control environment of the outsourcer
- Loss of inherent knowledge
- Reduced ability to monitor client services
- Too much outsourcing for one provider
Define Speculative Risk
Ability to make a gain, loss or breakeven
Define Pure Risk
Only possible to make a loss but not a gain
What are Fundamental Risks?
Widespread in their effect
What are Particular Risks?
Localised/Personal in their effect
Upside risk?
Potential gain
Downside risk?
Potential loss
Risks unique to insurance companies
- Underwriting risk
- Volatility
- Pricing
- Economic Factors
- Accumulation risk
- Reserving Risk
- Homogenous exposure aid forecasting
Risks facing insurance brokers and advisors
- Errors and Omissions
2. Insurer Security
Examples of strategic failures are:
- Poor/unsuitable products
- Failure of partnerships
- Inappropriate Merges and Acquisitions
Which area has the highest potential for Legal risk
USA/Europe
What is underwriting risk for insurance companies?
- Policy wording is too broad and hence in court will be in favour of the Policyholder
- Quoting incorrect premiums
- Accepting/Rejecting incorrect risks
What is volatility risks for insurance companies?
Inability to predict total amount of claims in a year and the timing of their occurrence.
What is economic risks for insurance companies?
Insurers carry large amount of funds as solvency margins/claims margins. Risk is these will be insufficient
What is accumulation risks for insurance companies?
Exposure to a single risk event or source
What is the difference between financial and liquidity risk?
Financial is in regards to financing and financial transactions.
Liquidity is the need to have money fast
Non-Financial risks include…
any association with physical loss i.e. destruction of a building in a fire. However, this is expressed in monetary terms
