Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Exam 7 > ERA 4-5 TIA > Flashcards

ERA 4-5 TIA Flashcards

1
Q

Definition of Operational Risk

A
  • The risk of loss resulting from inadequate or failed internal
    processes, people and systems or from external events.
  • This definition includes legal risk, but excludes strategic or
    reputational risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

5 Risks explicitly included in the definition of
Operational Risk

A
  • Internal Processes
  • People
  • Systems
  • External Events
  • Legal Risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

7 Types of Operational Risk

A
  • Internal Fraud
  • External Fraud
  • Employment Practices and Workplace Safety
  • Clients, Products and Business Practices
  • Damage to Physical Assets
  • Business Disruption and System Failures
  • Execution, Delivery and Process Management
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What 3 Possible Explanations does Mango give for a
Plan Loss Ratio Model not forecasting accurately?

A
  1. Model not able to accurately forecast loss ratios
  2. Model is able, but it was improperly used
  3. Model did forecast accurately, but management ignored its
    (unpopular) results
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

In the case of Lemur, was it Operational Risk or Insurance Risk that led to it’s downfall?

A

If all the other companies with that product also failed, then
it was insurance risk (eg. Asbestos)
Otherwise, it was operational risk:
1. Incorrect model was used (competitor’s had one that
worked)
2. Why wasn’t the model use tested or challenged
3. What governance was in place to hold management
accountable for their decision

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Which areas of a company are affected if a company
starts to implement effective cycle management? (4)

A
  • Planning
  • Underwriting
  • Objective Setting
  • Incentive Bonuses (these last two will generate significant
    opposition)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What characteristics are considered from a System
Performance Perspective? (4)

A

The System should be:
* Stable
* Available
* Reliable
* Affordable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What questions should we ask to determine a
company’s Cycle Management Strategy? (3)

A
  1. Does the company have a proactive cycle management
    strategy
  2. Does the company know where in the cycle the market
    stands at any given time?
  3. Are underwriters making decisions that are consistent with 1. and 2.?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What 4 Items should a company focus on during the
soft part of a cycle?

A
  • Intellectual Property
  • Underwriter Incentives
  • Market Overreaction
  • Owner Education
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Why is Intellectual Property so important to an
Insurance Company?

A

A majority of the insurer’s franchise value is Intellectual Property:

  • Experts in U/W, Claims, Finance, Actuarial
  • Proprietary database of policyholder information
  • Forecasting Systems
  • Market Relationships
  • Reputation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What should an Insurer do to maintain it’s Intellectual
Property? (3)

A

To maintain this asset, the company should:
1. Retain Top Talent, Grow and Develop Their Skills
2. Maintain Presence in Core Market Channels
3. Maintain a Consistent Pattern of Investment in systems,
models and databases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Agency Issues in ORM (3)

A

Owners and Management’s incentives are not aligned

  • Giving Management incentives based on company value
    growth could lead them to be too aggressive
  • On the other hand, if the manager’s wealth is tied up in the
    company, this could lead the manager to be too risk averse
  • Production incentives for underwriters are common. This
    could lead to sloppy underwriting or mispricing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Some Operational Risks that are common to all
businesses (5)

A
  • Pension Funding (Has HR and financial components)
  • IT Failure Risk (hardware and software failure, contingency planning is critical)
  • Other HR Risks (loss of important staff, misdesign of compensation system)
  • Reputational Risk
  • Lawsuits
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is Control Self-Assessment?
What are it’s objectives?

A

A process through which internal control effectiveness is
examined and assessed.

The objective is to provide reasonable assurance that all
business objectives will be met

Objectives of internal control are to ensure:
* Reliability and Integrity of Information
* Compliance with policies, laws and regulations
* Safeguarding of Assets
* Economical and Efficient Use of Resources
* Accomplishment of Objective and Goals

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Why are Key Risk Indicators a useful complement to
Control Assessment?

A

*KRI’s can be updated with a higher frequency
* Keep the risk management process dynamic

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Six Sigma

A
  • Used for Process Improvement in High Volume Processing
  • Identifies and Eliminates issues:
    – Inefficiencies
    – Errors
    – Overlaps
    – Gaps in Communication
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How to model Operational Risk

A

For Operational Risk Sources
1. Indentify Exposure Base for each Risk
2. Measure Exposure for each business unit and risk source
3. Estimate the Loss potential per unit of exposure
4. Combine 2) and 3) to produce loss distribution
5. Estimate the impact of mitigation, process improvements
and risk transfer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

List examples of Owner Education - in the context of
Cycle Management (3)

A

Good for owners to know:

  • some Ratios will not appear healthy during soft markets
  • Premium Volume will drop
  • Overhead Expenses to Premium will increase
    – this should be seen as an investment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is Strategic Risk, according to Mango?

A

Intentional Risk Taking to meet an Organization’s
Goals

20
Q

Elements of Strategic Risk, by Baird & Thomas (7)

A
  • Voluntariness of Exposure
  • Controllability of Consequences
  • Discounting in Time
  • Discounting in Space (shift risks to competitors)
  • Knowledge of Risky Situation
  • Magnitude of Risk
  • Group/Individual Factors
21
Q

Categories of Risk - Slywotzky & Drzik (7)

A
  • Industry - Capital Intensiveness, Overcapacity
  • Technology - Shift, Obsolescence
  • Brand - Erosion, Collapse
  • Competitor - Global Rivals, Unique Competitors
  • Customer - Priority Shift, Power
  • Project - Failure of R&D, IT
  • Stagnation - Flat Volume, Price Declines
22
Q

Scenario Planning Description

A
  • use a Limited Number of Scenarios
  • Test Scenarios for internal consistency; explore
    impact of several variables
  • change severable variables at a time to capture new states after shocks
  • scenarios include subjective interpretation of factors, so cannot be explicitly modeled
  • Capture the richness of range of possibilities
23
Q

Agent-Based Modeling (3)

A
  • Program Agents into the Model
  • Each Agent Responds to the Market
  • This creates a Complex System with “emergent
    properties”
24
Q

Price Competition in Insurance Market is inevitable
because …

A
  • Entry into the business is easy
  • Insurers have not been able to Patent, Copyright
    or Franchise their product
25
Q

Why is Price and Quantity difficult to define in
Insurance?

A
  • Many details of the policy influence “price”
  • Deductible, Limits, Policy Terms
  • Quantity is difficult to determine for the same
    reasons
26
Q

How can the Underwriting Cycle of one line of
business affect the cycle of another line?

A

If there are companies that write both lines of
business, then a reduction in capital due to losses
in one line of business, results in capital constraints
for the whole company - thus affecting both lines

27
Q

Stewart’s 4 stages of the insurance business

A
  • Emergence - Underwriting cycles
  • Control - stability reached, usually with help of regulator
    or rating bureau
  • Breakdown - New Technology or Social Changes
  • Reorganization - takes us back to Emergence
28
Q

What are 4 Leading Theories for the Cause of the
Underwriting Cycle

A
  • Institutional Factors - lags in data lead to cycles
  • Competition - some firms underprice
  • Supply & Demand of Capital - losses eat into capital,
    raising prices
  • Economic Linkage - profitability is linked to the economy through investment income, cost of capital, expected losses, price of risk
29
Q

Feldblum’s View on Competition

A

Company Strategy is either
* Aggressive Growth, or
* Price Maintenance - book may get smaller

30
Q

How Do Capital Constraints Contribute to the
Underwriting Cycle? (4)

A
  • Capital determines the available Supply of Insurance
  • Losses reduce capital, reducing supply and thus increasing price
  • Best clients leave first (they pay for a well capitalized insurer)
  • Capital cannot be replaced quickly, which creates a lag
31
Q

Why do the best clients leave after a company has a
loss to capital?

A
  • Some clients will pay additional premium for a
    well capitalized insurer
  • These clients have the highest profit margin
  • They are the first to leave if an insurer has capital
    problems
32
Q

Predictive Variables to consider for modeling the
underwriting cycle

A
  • Historical Criterion Variable - eg. Combined Ratio, and
    components
  • Internal Financial Variables - Reserves, Capital, Reinsurance
  • Regulatory/Rating Variables - downgrades, upgrades
  • Reinsurance Sector Financials - capital held by reinsurers
  • Econometric Variables - inflation, unemployment, GNP
  • Financial Market Variables - interest rates, stock market
    returns
33
Q

Sources for Competitive Intelligence

A
  • Company’s own Agents
  • Customer Surveys - especially at renewal
  • Trade Publications / News
  • Rate filings
  • Be aware of antitrust and other legal issues
34
Q

When modeling the underwriting cycle, Is the following more important for Soft or Technical Modeling?

Data Quantity, Variety and Complexity

A

Soft

35
Q

List three methods used when using a Soft model for
the Underwriting Cycle

A
  • Scenarios
  • Delphi Method
  • Formal Competitor Analysis
36
Q

What Statistical Model is recommended for a
Technical model of the Underwriting Cycle?

A
37
Q

Advantages of VarMax compared to an AR(2) model

A
  • Handles multiple simultaneous variables -
    Combined Ratio, Market Size Growth
  • External Variables as well - GDP Growth
38
Q

Formulas for a General Factor Model for the
Underwriting Cycle

A
39
Q

3 Examples of Events that could lead to a Shift in the
Supply Curve

A

Price vs. Quantity - curve slopes up to the right
* New Entrants to Market - Down and Right
More Quantity for same Price
* Technological Changes - Down and Right
* Higher Capital Requirements - Up and Left

40
Q

What is the impact on the Demand Curve from the
market having Excess Capital?

A

Customers see product as more valuable.
Demand Curve shifts Up and Right

41
Q

Shape of an Individual Firm Demand Curve vs.
Industry Demand Curve

A

A Single Firm Demand Curve will be flatter, since
clients can go to another company

42
Q

Explain the Gron Supply Curve

A
  • A limited supply is offered at the price of
    expected losses and marginal expense
  • Additional Quantity will require an increase in
    Price
  • At a sufficiently high price, the profits fulfill the
    capital needs - this is the asymptotic highest price
43
Q

What do Capital Flows Look like Under:

a) Normal Profits
b) High Profits
c) Low Profits or Losses

A

a) Normal: Profits Dividends Paid; Capital Outflow
b) High Profits: New Investors, Capital Inflow
c) Low Profits: or Losses Capital Outflow via Losses or Exit

44
Q

The Components of the Underwriting Cycle (6)

A
  • Economic Factors
  • Capital
  • Current Level of Prices & Losses
  • Supply & Demand Curves
  • Premium & Losses
  • Profitability
45
Q

How do you fit a General Factor Model?

A
  • Generalized Method of Moments
  • Efficient Method of Moments

Exam 7 (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions