Chapter 9 - Risk classification

Question 1

Seven risk concepts

Answer 1

Exposure
Volatility
Probability
Severity
Time horizon
Correlation
Economic Capital

Question 2

Four main risk categories

Answer 2

Market risk
Credit risk
Operational risk
Underwriting/insurance risk

Question 3

Risk classification

Answer 3

PFS PROCLAIMER CLIMBED

P Political
F Foreign exchange
S Strategic

P    Project
R    Reputational
O    Operational
C   Credit
L    Liquidity
A    Agency
I     Interest
M   Market
E   Economic
R   Regulation

C   Conduct
L   Legal
I    Insurance
M  Moral hazard
B   Basis
E   Environmental
D   Demographic

Question 4

Insurance risk

Answer 4

Demographic risk (mortality and morbidity)
Non-life insurance risks
Persistency risk
Expense risk
Underwriting (level) risk
Reserving risk

Question 5

Operational risk

Answer 5

Process
People
Technology
Event
Business
Crime
Regulatory
Project
Strategic

Question 6

Systematic & Non-Systematic risk

Answer 6

Systematic: Not diversifiable, affects large number of quantities of interest (contagion)

Non-systematic: Uncorrelated/independent from other risk sources

Question 7

Types of legal risk

Answer 7

New legislation or changes to current:
may be positive - deregulatrion or costly - compliance/prohibition

Risk inherent in contract provisions:
Poorly worded contracts, clauses, guarantees

Legal rulings:
Cost of court case, adhering to ruling, compensation, loss of reputation

Question 8

Risk management function skill set

Answer 8

Change management
Project management
Implementation management
Technical expertise
Relationship management

Question 9

‘Three lines of defense’ of a risk management function

Answer 9

First line: Line management staff in business units

Second line: Risk management team in the CRF (relationship with first line characterised by risk management structure)

Third line: Audit function, overseas the two

Question 10

Typical risk management policy (IAA Practice Note, Appendix 6)

Answer 10

Introduction
Include definition of RM and ERM
State objectives of ERM

Risk management policy
  State objectives of RMP
  Categorise and define risk
  Outline the potential beenfits of ERM
  Summarise the success criteria

Risk management structure
Provide a chart of organisational structure
Define role of each of main parties

Risk identification and assessment process
Provide overview of process and detail each step

Risk reporting process
Describe the process, provide examples

Appendices and Glossary
More detail on content and terms