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ERM Flashcards

1
Q

Five Main Areas/Subfactors of ERM

A
  1. Risk management culture
  2. Risk controls
  3. Emerging risk management
  4. Risk models
  5. Strategic risk management
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2
Q

Insurer’s ERM Score - Describe overall score based on subfactors

A
  1. Very strong - strong & positive score for all subfactors and Economic capital model is assessed as either good or superior
  2. Strong - risk management culture, risk controls, and strategic risk management subfactors are scored positive, one or both of the other two subfactors is scored neutral, no subfactor is scored negative
  3. Adequate with strong risk controls - risk controls subfactor is scored positive, strategic risk management subfactor is scored neutral, and no subfactor is scored negative
  4. Adequate - risk controls and risk management culture subfactors are scored at least neutral; overall doesn’t satisfy the requirements for Adequate with strong risk controls
  5. Weak - one or both of the risk controls and risk management culture subfactors are scored negative
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3
Q

Considerations for the scoring of each risk under ERM

A
  1. Risk identification
  2. Risk measurement and monitoring
  3. Risk standards and limits
  4. Procedures to manage risks to stay within limits
  5. Execution of risk control programs
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4
Q

Uses of risk models under ERM

A
  1. Measure risk exposures
  2. Test risk correlation and diversification
  3. Validate risk mitigation strategies
  4. Quantify capital requirements for a given risk profile
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5
Q

Key areas of analysis for strategic risk management score under ERM

A
  1. Company’s strategic planning
  2. Product pricing and re-pricing
  3. Strategic asset allocation
  4. Reinsurance strategy
  5. Net retained risk profile
  6. New risk-bearing initiatives
  7. Capital budgeting
  8. Economic budgeting
  9. Optimization of risk-adjusted returns
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6
Q

Main risks for life insurers and health insurers

A
  • Life insurers main risks
    • Policyholder behavior risks
    • Mortality risk
    • Longevity risk
    • Morbidity risk
  • Health insurers main risk
    • Morbidity risk
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7
Q

Two key items of uncertainty of reserving risk for P&C

A
  1. Level of reserves that will utltimately be needed to meet all liabilities
  2. Timing of those liabilities
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8
Q

Significant concerns for health insurers and key risks under ERM

A
  • Significant conerns
    • Rising medical costs
    • Changing regulations and legislation
    • Less-than-perfect data in the underwriting and pricing processes
  • Key risks
    • Underwriting risk
    • Pricing risk
    • Claims management risk
    • Provider renewal risk
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9
Q

Key elements essential to all insurers’ Operational Risk Controls under ERM

A
  1. Procedures in place to systematically identify operational risks and to monitor, assess, and mitigate those identified risks.
  2. Sound business continuity plan that has undergone mutliple drills
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10
Q

Key areas of an insurer’s risk management culture

A
  1. Risk governance and organization structure
  2. Risk appetite framework
  3. Risk reporting and communication
  4. Incentive compensation structures
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11
Q

Definition and Two key principles of ERM

A
  • Definition: ERM is a structured analytical process focused on identifying and eliminating the financial impact and volatility of a portfolio of risks, rather than focusing on risk avoidance alone.
  • Key Principles of ERM:
    1. Recognizes broad range of risks as either sources of capital or potential for losses
    2. Holistic approach to managing diverse risks - risks are not isolated in silos
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12
Q

Risk domains of ERM

A
  1. Operational - organization’s core business, including systems and practices
  2. Financial - organizations ability to earn, raise, or access capital, as well as costs associated with transfer of risk
  3. Human - recruiting, retaining and managing workforce
  4. Strategic - ability of organization to grow and expand
  5. Legal/Regulatory - health care statutory and regulatory compliance, licensure, and accreditation
  6. Technological - associated with biomedical and information technologies, equipment, devices and telemedicine
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13
Q

Issues with traditional risk management

A
  1. Fails to appreciate relationships among risks
  2. Lacks optimization of collective risk evaluation
  3. Lacks common definition of risk and how to guage risk management efforts
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14
Q

Risk handling categories under ERM (ways to deal with risk)

A
  1. Risk avoidance
  2. Acceptance
  3. Reduction
  4. Sharing
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15
Q

Roles and responsibilities under ERM

A
  1. CRO - responsible for identifying and quantifying risks and managing the process, analyzing risk strategically. Facilitator, liaison, etc.
  2. Board of Directors - provides oversight, understand key elements and discuss risks regularly
  3. CEO/President - responsible for molding corporate cutlure and making sure ERM functions effectively
  4. CFO - provides analytical insight to determine risk appetite
  5. Health Care Risk Manager - front lines of risk management and focused on daily operations
  6. Middle Managers and Others - understand risks they are accountable for and manage them within approved tolerances
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16
Q

COSO ERM Framework

A
  1. Process
  2. Effected by people
  3. Applied in strategy setting
  4. Applied across enterprise
  5. Designed to identify potential events
  6. Manages risks to be within risk tolerance
  7. Provides “reasonable assurance”
  8. Supports achievement of key objectives
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17
Q

What distinguishes CRO from Risk Manager?

A
  • Risk Manager
    • Snapshot view
    • Lacks wider view to see patterns/relationships
    • Not sufficiently involved with sr. leadership
    • Decisions based on isolated issues or circumstances
  • CRO
    • Decision based on total picture of risks and opportunities
    • Connects dots among risks in all departments; Empowered to examine workings of all departments
    • Unlimited access to sr. management
    • Thinks outside the box
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18
Q

Three major tasks for CRO (broad list)

A
  1. Coordinating all risk management activities
  2. Introducing integrated framework
  3. Improving risk communication with internal and external partners
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19
Q

Key tasks for CRO (different from major tasks for CRO)

A
  1. Train and communicate with workforce on policies and structures
  2. Educate investment committee on risk management strategy
  3. Chair ERM committee
  4. Determine risk tolerance
  5. Develop alternative risk strategies
  6. Ensure compliance with regulations
  7. Disclosures (internal and external)
  8. Evaluate insurance coverage
  9. Assure business continuity
  10. Identify and monitor emergent risks
  11. Extend risk principles to broader strategy
  12. Policy assessment
  13. Inform board of significant risk issues
  14. Deliver integrated picture of risk
  15. Develop data strategy to build picture of operational risk
  16. Develop framework for risk management

HINT: TIC TAC DICES PB PDF

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20
Q

Regulatory action levels for health RBC ratios

A
  1. Company action: 150%-200% - submit corrective action plan
  2. Regulatory action: 100%-150% - submit corrective action plan and Commissioner may issue an order specifying corrective actions
  3. Authorized control: 70%-100% - Commissioner may place company under regulatory control
  4. Mandatory control: <70% - Commissioner must take regulatory control of the company
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21
Q

Reasons why NAIC RBC model influences states that haven’t adopted the model act

A
  1. All companies filing an Orange blank (medical) must calculate health RBC for annual statement
  2. Regulators are familiar with the RBC concept and express concerns when TAC/ACL ratio is below 200%
  3. Quasi-regulatory agencies like BCBS have embraced Health RBC ratios and may require these levels from companies associated with them
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22
Q

Formula for health RBC after Covariance (RBCAC)

A

RBCAC = H0+Sqrt(H12+H22+H32+H42)

  • H0 - Asset risk for affiliates
  • H1 - Asset risk for other assets
  • H2 - Underwriting risk
  • H3 - Credit risk
  • H4 - Business risk

Authorized Control Level (ACL) = RBCAC/2

Health RBC ratio = total adjusted capital (TAC) / ACL

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23
Q

Components of Underwriting risk (H2)

A
  1. Claims fluctuation risk
  2. Other underwriting risk
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24
Q

Life RBC formula

A

RBCAC = C0+C4a+sqrt[(C1o+C3a)2+(C1cs+C3c)2​+C22+C3b2+C4b2]

  • C0 - Asset risk - affiliates
  • C1cs - Asset risk - unaffiliated common stock and affiliated noninsurance stock
  • C1o - Asset risk - all other
  • C2 - Insurance risk
  • C3a - Interest rate risk
  • C3b - Health credit risk
  • C3c - Market risk
  • C4a - Business risk
  • C4b - Admin component of business risk
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25
Q

Procedures and uses of the simplified RBC estimations

A
  • For health insurance H2 is the dominant risk, so the RBC = H2
  • As a result, RBC Rationew ≈ RBC Ratioprior * (oldH2/newH2)
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26
Q

Categories of risk faced by organizations

A
  1. Basis risk
  2. Foreign exchange risk
  3. Liquidity risk
  4. Non-life insurance risk
  5. Systemic risk
  6. Demographic risk
  7. Operational risk
  8. Credit risk
  9. Residual risk
  10. Interest rate risk
  11. Market and economic risk
  12. Environmental risk

HINT: BELLS DO CRIME

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27
Q

Types of systemic risk

A
  1. Common market positions
  2. Financial infrastructure
  3. Liquidity risk
  4. Exposure to common counter-party

HINT: MILC

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28
Q

Types of demographic (mortality/longevity) and non-life insurance risk

A
  1. Level risk (for life insurance) or underwriting risk (for non-life insurance)
  2. Volatility risk
  3. Catastrophe risk
  4. Trend risk
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29
Q

Basel Committee definitions of types of operational risk

A
  1. Internal fraud
  2. External fraud
  3. Employment practices and workplace safety
  4. Client, products, and business practices
  5. Damage to physical assets
  6. Business disruption and system failures
  7. Execution, delivery, and process management
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30
Q

Other types of operational risk (non-Basel definitions)

A
  1. Crime risk
  2. Technology risk
  3. Cyber risk
  4. Regulatory risk
  5. People risk
  6. Legal risk
  7. Model risk
  8. Data risk
  9. Reputational risk
  10. Project risk
  11. Strategic risk
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31
Q

Other types of operational risk (non-Basel definitions): Types of People risk

A
  1. Indirect employment-related risks
  2. Adverse selection
  3. Moral hazard
  4. Agency risk
  5. Bias
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32
Q

Broad areas in the risk identification process

A
  1. Risk identification tools
  2. Risk identification techniques
  3. Assessment of the nature of the risks
  4. Recording risks in a risk register
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33
Q

Risk identification tools

A
  1. SWOT analysis
  2. Risk check lists
  3. Risk prompt lists
  4. Risk taxonomy
  5. Risk trigger questions
  6. Case studies
  7. Risk-focused process analysis
34
Q

Risk Identification techniques

A
  1. Brainstorming
  2. Independent group analysis
  3. Surveys
  4. Gap analysis
  5. Delphi technique
  6. Interviews
  7. Working groups
35
Q

Definition of Economic Capital

A
  1. Key items in definition:
    1. Additional assets or cash flows to cover unexpected items
    2. Amount needed to cover these unexpected events to a specified measure
    3. Consider the risk over a specified time horizon
  2. Common definition: additional value of funds needed to cover potential outgoings, falls in asset values and rises in liabilities at some given risk tolerance over a specified time horizon
36
Q

Purpose of an internal economic capital model

A
  1. Determine how much capital it should hold to protect against adverse events
  2. Gives better understanding of financial implications of current strategy
  3. Help to price new products
  4. Decide how to allocate capital across business lines
  5. Assess amount of economic capital to be held as products develop over time
  6. Assess impact of changes in investment strategy and capital structure of organization
  7. Determine optimal mixes of assets and funding sources
  8. Look at how organization copes with extreme events
  9. Measure performance (calculating return on capital)
  10. Carrying out due diligence for corporate transactions (M&A)
  11. Provide information on the financial state of an organization to regulators
37
Q

Measures of Economic Capital

A
  1. Return on Capital, ra=Risk Adjusted Return / EC
  2. Economic Income Created, EIC = (ra-rH)*EC
  3. Shareholder Value, SV = (ra-rG)/(rH-rG)*EC
  4. Shareholder Value Added, SVA = SV - EC

EC = Economic Capital, ra=risk adjusted return on capital, rH=Hurdle rate of return, rG=Rate of growth of future cash flows

38
Q

Factors to include in Margin

A
  1. Uncertainty implicit in the product
  2. Extent to which the product acts as a diversifier to other businesses
  3. Volume of product sold
  4. Experience that emerges from the product
39
Q

Designing an economic capital model

A
  1. Agree what model is for
  2. What risks will be modeled
  3. What approach will be used
    1. Factor table approach
    2. Deterministic approach
    3. Stochastic approach
  4. Will model be run on enterprise-wide basis or run for each individual business line and aggregated
  5. Nature of output required
40
Q

Management actions that require decisions or changes to the capital model

A
  1. Changes to investment strategy in response to performance
  2. Sources and amounts of capital
  3. Decisions on withdrawal of particular products
  4. Levels of reinsurance
  5. Premium rates
  6. Dividends payable
  7. Bonsus payable on with-profit policies
41
Q

Options for allocating the benefits of diversification

A
  1. Allocate the full capital requirement to each line, retain diversification benefit centrally
  2. Give full benefit of diversification to the new line of business that triggers the benefit
  3. Allocate the benefit in proportion to the stand-alone capital requirements by line of business
  4. Euler capital allocation principle - consider the marginal contribution of each additional unit of business to the overall capital required
42
Q

Reasons for reinsuring accident and health products

A
  1. To transfer risk
  2. To enable an insurer to offer products in a market in which it lacks expertise
  3. To share financial load
43
Q

Proportional reinsurance methods

A
  1. Coinsurance
    1. Fixed/Excess share
    2. Quota share
  2. Modified coinsurance
  3. Funds withheld coinsurance
  4. Risk premium reinsurance
44
Q

Nonproportional reinsurance methods

A
  1. Extended wait
  2. Excess or stop loss reinsurance
  3. Specified benefits or carve out benefits
  4. Claim takeover reinsurance and runoff blocks
  5. Catastrophe covers
45
Q

Purchasers of medical reinsurance

A
  1. Traditional insurers offering both first dollar insurance and excess of loss coverage
  2. Employers providing self-insured plans to employees
  3. HMOs providing services
  4. Certain providers that offer prepaid benefit plans
46
Q

Aproaches for defining coverage periods for health reinsurance

A
  1. Loss Ocurring Basis
    • Claims only covered if occurring during the agreement year
  2. Risk Attaching Basis
    • Reinsurance period for underlying risks coincides with the insurers policy year
47
Q

Primary approaches to medical reinsurance

A
  1. Quota share
  2. specific stop loss or excess
  3. aggregate stop loss or excess
  4. Combined specific and aggregate stop loss
  5. carve out coverages
48
Q

Key questions regarding the source of the business for medical reinsurance

A
  1. Is it coming from HMO?
  2. Does plan include PPO networks?
  3. How do benefits vary inside and outside of the networks?
  4. How are reasonable and customary limits applied?
  5. What employer groups are targeted and how are occupational hazards handled?
  6. What amounts are self-insured employer groups required to retain?
49
Q

Additional uses of reinsurance (other than traditional coverages)

A
  1. Captive reinsurers for employee benefits
  2. Stop loss for providers who offer per capita services
  3. Securitizations of health insurance with a special purpose vehicle
  4. Capital relief with a portfolio reinsurance agreement
50
Q

Issues to consider for insurers and reinsurers relating to compliance

A
  1. Proper disclosure and communication of terms and conditions and appeals process
  2. Prompt and fair claim adjudication
  3. Fair access to discounts and networks for all insureds
  4. Benefits must meet or exceed ACA requirements and state regulation
51
Q

Impacts of the ACA on the reinsurance market

A
  1. Reinsurance solutions to removal of annual and lifetime benefit limits are:
    1. Ability to purchase separate layers of stop loss reinsurance
    2. insurer retains excess risk
    3. reinsurer accepts unlimited risk and purchases retrocession coverage
  2. The requirement for unlimited and mandatory benefits led to cost adjustments
  3. Reinsurance of limited benefit medical policies is now seldom needed
  4. Reinsurance has been provided to plans on the ACA exchanges
  5. There has been little effect on the reinsurance of medical benefits, other than to increase demand
52
Q

Key aspects of why Co-Ops fail

A
  1. Critical health plan functions
  2. Marketing
  3. Benefit design
  4. Pricing strategies
  5. High vs Low enrollment
  6. ACA’s premium stabilization programs
  7. Adjusting to market conditions
53
Q

3 Key decisions by federal policymakers that increased chances that Co-Ops would fail

A
  1. Budget agreements slashed program’s $6 billion allocation by almost 2/3rds (to 2.4 billion)
  2. Allowed states to permit individuals and small employers to remain enrolled in pre-ACA policies (for a transitional period)
  3. Disabled ACA’s risk corridor program in late 2014 by mandating that it be budget neutral
54
Q

Key policy decisions to reduce some hurdles for Co-Ops, made by the Obama administration

A
  1. Relaxed marketing restrictions to engage the public
  2. Flexibility to sign up large employers
  3. Repayment of federal loans subordinate to payment of member’s claims
55
Q

Key considerations for an innovative product offering

A
  1. Reacting to emerging experience and environmental changes
    • Pay attention to early indicators of experience coming in different than expected
  2. Assumption-related risk
    • Sensitivity and scenario testing to identify and quantify key assumptions
  3. Contractual provisions
    • Clear, detailed wording and protection against future changes. Unambiguous and easy to understand language
  4. Embedded guarantees, incentives, and policyholder behavior
    • Align policyholders and company incentives. Hedge or mitigate risk with product design
  5. Competitive pressures and the importance of including margins
    • Build in pricing margins higher than normal to account for increased uncertainty
  6. Potential limitations in future ability to leverage risk management tools
    • Build mechanisms into product design to mitigate unfavorable experience
  7. Regulatory risk
    • Regulations likely to change in products lifetime, so this must be considered
  8. Distribution system risk
    • Distributors should know the product and the company philosophy

HINT: RACE CARS

56
Q

ORSA practical considerations

A
  1. Be the responsibility of the company
  2. Incorporate forward-looking assessment of all material risks
  3. Be embedded in the decision-making processes of the business
57
Q

ORSA includes ongoing processes to support:

A
  1. Risk identification and prioritization
  2. Risk measurement
  3. Articulation of risk appetite and tolerances
  4. Implentation of risk limits and controls
  5. Development of risk mitigation strategies
  6. Capital adequacy assessment
  7. Governance and risk reporting
58
Q

Definition and requirements of ORSA

A
  1. Definition: a confidential internal self assessment of the risks associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks
  2. Requirements:
    1. Regularly conduct an ORSA to assess adequacy of its risk management framework, and current and estimated projected future solvency position, done at least annually
    2. Internally document the process and results of assessment
    3. Provide a confidential, high-level ORSA summary report annually to the lead state commissioner and, upon request, to the domiciliary state regulator
59
Q

Primary goals of ORSA

A
  1. Foster an effective level of ERM at all insurers to assess, identify, monitor, prioritize and report on material and relevant risks identified by the insurer, using appropriate techniques for the nature, scale, and complexity of the risks, in a manner that is adequate to support risk and capital decisions
  2. Provide a group-level perspective on risk and capital, as a supplement to the existing legal entity view
60
Q

Exemptions from filing ORSA summary report

A
  1. Individual insurer’s annual direct written and unaffiliated assumed premium less than $500 million AND
  2. Insurer is a member of an insurance group and the insurance group’s annual direct written and unaffiliated premium is less than $1 billion (including international direct and assumed premium but excluding premiums reinsured with the Federal Crop Insurance Corporation and the National Flood Insurance Program)
61
Q

Major sections of an ORSA summary report

A
  • Section 1: Description of insurer’s risk management framework
  • Section 2: Insurer’s assessment of risk exposure
  • Section 3: Group Assessment of risk capital and prospetive solvency assessment
62
Q

Key information to include in an ORSA summary report

A
  1. Accounting basis for the report (GAAP, STAT, or IFRS)
  2. Date or time period that the report represents
  3. Scope of the ORSA, such that the report identifies which insurers are included in the report
  4. Short summary of material changes to the ORSA from prior years (including rationale)
63
Q

Effective ERM framework key principles under ORSA

A
  1. Risk culture and governance
  2. Risk identification and proioritization
  3. Risk appetite, Tolerance, and Limits
  4. Risk management and controls
  5. Risk reporting and communication
64
Q

ORSA Section 1 items

A
  1. Provide a high-level overview of principles
  2. Describe how insurer identifies and categorizes relevant and material risks and manages them
  3. Describe risk-monitoring processes and methods, provide risk appetite statements and explain risk tolerances and the amount and quality of risk capital
  4. Identify assessment tools used to monitor and respond to changes in risk profile
  5. Describe how insurer incorporates new risk information to monitor and respond to changes in risk profile
65
Q

Approach and assessment of group-wide capital adequacy considerations under ORSA

A
  1. Effects of contagion risk, concentration risk and complexity risk
  2. Level of leverage from holding company debt, if any
  3. Diversification credits and restrictions on the fungibility of capital within the holding company
  4. Elimination of intra-group transactions and double-gearing where same capital is used simultaneously as a buffer against risk in two entities
  5. Effects of liquidity risk or calls on the insurer’s cash position

HINT: CLD S L (Could Share Losses)

66
Q

ASOPs

A
  • ASOP 12 - Risk Classification
  • ASOP 23 - Data Quality
  • ASOP 41 - Actuarial Communications
  • ASOP 45 - The Use of Health Status Based Risk Adjustment Methodologies
  • ASOP 46 - Risk Evaluation in ERM
  • ASOP 47 - Risk Treatment in ERM
  • ASOP 55 - Capital Adequacy Assessment
67
Q

ASOP 23 - Communication and disclosure should include

A
  1. Source of data
  2. Whether actuary reviewed, and if not then disclose resulting limitations
  3. Reliance on data and other information
  4. Material adjustments or assumptions applied to data
  5. Limitations on work due to data quality
  6. Unresolved concerns
  7. Highly uncertain results including potential magnitude
  8. Conflicts from complying with laws and regulations
68
Q

ASOP 23 - Considerations in selecting data

A
  1. Cost and feasibility of alternative data and time required
  2. Reasonableness and comprehensiveness
  3. Benefit to be gained from alternative data
  4. Assignment scope and intended use
  5. Desired and possible alternative data elements
  6. Internal and external consistency
  7. Appropriateness for intended purpose
  8. Material limitations
  9. Sufficiently current
  10. Sampling methods to collect the data

HINT: FR BAD CALCS

69
Q

ASOP 23 - Data reliance and review

A
  1. Reliance on information
    1. Validate responsibility of those who supply data
    2. Disclose reliance on data supplied by others
  2. Review data for reasonableness and consistency
    1. Data definitions
    2. Identify questionable data
    3. Consider further steps to improve data quality
    4. Disclose if do not review
    5. If data inadequate obtain different data or decline assignment
70
Q

Asop 23 - Limitiation of actuary’s responsibility (a.k.a things not required)

A
  1. Determine if data supplied by others falsified
  2. Develop compilations solely to search for questionable data
  3. Audit data
71
Q

ASOP 41 - Requirements for actuarial communications and reports

A

Disclosures:

  1. Form and content: appropriate to circumstances and intended audience
  2. Clarity: language appropriate to circumstances and users
  3. Timing of communication: within reasonable period
  4. Complete an actuarial report if you intend for actuarial findings to be relied upon by any intended user
  5. Sufficient clarity that another actuary qualified in same practice area could appraise reasonableness
  6. Specific circumstances: be prepared to justify limiting the content
  7. Explanation of material differences from earlier results
72
Q

ASOP 41 Disclosures

A
  1. Scope of assignment
  2. Methods, assumptions, and data used
  3. Actuarial findings
  4. Identification of responsible actuary
  5. Identification of actuarial documents comprising report
  6. The indended users of the report
  7. Acknowledgement of actuary’s qualification
  8. Cautions about risk and uncertainty
  9. Limitations
  10. Conflict of interest
  11. The information date
  12. Subsequent events
  13. Deviation from ASOP
  14. Assumptions or methods prescribed by law
  15. When rely on other sources and disclaim responsibility
    1. The assumption or method that was set by another party
    2. Party who set the assumption or method
    3. Reason that this party set the assumption or method, and
    4. Either (the assumption conflicts with professional judgement) OR (actuary was not qualified to judge reasonableness or unable to judge without substantial additional work)
73
Q

ASOP 46 - Disclosure Elements

A
  1. Changes in system/process
  2. Risks included
  3. Assumptions
  4. Model validation
  5. Economic capital and economic capital models
  6. Emerging risks
  7. Stress and scenario tests

HINT: CRAVERS

74
Q

ASOP 46 - Considerations relating to stress and scenario tests

A
  1. Extent to which tests reflect similar or different degress of adversity
  2. Items in the business plan that describe how the organization will function during extreme events
  3. Extreme event scenario may be a single event or series of events
  4. How actions and reactions of various stakeholders and markets during extreme events may differ from those during normal times
  5. Whether assumed interdependencies are appropriate under testing assumptions due to possibility of unanticipated consequences when risks interact in ways not seen historically
  6. How to define situations that result in non-quantifiable risk and how to show those effects
  7. Some tests will be hypothetical situations, for which the actuary will not need to validate if it is realistic
75
Q

ASOP 47 - Definition and aspects of risk treatment

A
  1. Definition of risk treatment - the process of selecting actions and making decisions to transfer, retain, limit, and avoid risk
  2. Aspects of risk treatment:
    1. Determining risk tolerance
    2. Choosing risk appetites
    3. Setting risk limits
    4. Performing risk mitigation activities
    5. Optimizing organizational objectives relative to risk
76
Q

ASOP 47 - Considerations regarding risk treatment

A
  1. Financial strength, risk profile and risk environment
    1. Financial flexibility
    2. Nature, scale and complexity of risks
    3. Potential differences between current and long-term risk environments
    4. Strategic goals (including level of volatility of profits)
    5. Interests (risk/reward expectations of relevant shareholders)
    6. Regulatory or rating criteria for risk levels and implications of those levels
    7. Degree to which risks interact with one another and diversification benefits
    8. Fungibility of capital
    9. Organization’s exposure to risks compared to competitors
  2. Own risk management system
    1. Risk tolerance
    2. Risk appetite
    3. ERM control cycle
    4. Board of director’s knowledge and experience about risk amangement
    5. Execution of ERM control cycle
  3. Relationship between financial strength, risk profile and risk environment and organization’s risk management system
  4. Indended purpose and uses of work product.
77
Q

ASOP 47 - Considerations for reviewing organizational risk parameters

A
  1. Financial and non-financial benefits associated with each activity
  2. Degree of concentration of risks
  3. Opportunities to mitigate breaches of risk limits and tolerance (including cost and effectiveness of mitigations)
  4. Regulatory or accounting constraints
  5. Relationship between risk tolerance, risk appetite and risk limits
  6. Historical volatility of organization’s results
78
Q

ASOP 47 - Considerations for reviewing risk mitigation strategies

A
  1. Qualitative aspects
    1. Resilience of organization under common fluctuations and extreme conditions
    2. Operational capabilities to implement risk mitigation
    3. Potential risk to organizational reputation
  2. Cost and potential effectiveness
    1. Availability of risk mitigation instruments current and future
    2. Counterparty credit risk
    3. Basis risk nature and degree
    4. Degree of confidence that mitigation can be maintained/repeated
    5. Availability of data
    6. Variability of outcomes after mitigation
    7. Accounting treatment
    8. Regulatory constraints
    9. Granularity of modeling needed
79
Q

ASOP 55 - General considerations of capital adequacy assessment

A
  1. Risk profile and capital
  2. Business and risk drivers
  3. Insurers plans and strategies (and likelihood of success)
  4. Timing and variability of projected liability and asset cash flows
  5. Existing or accessible resources (capital, data, computing power, human resources)
  6. Effect of changes in risk profile on capital adequacy
  7. Correlation of risks and events, concentration of exposures, diversification and interdependence
  8. Future economic condition projections
  9. Parameter uncertainty
  10. Methodology for capital assessment
80
Q

ASOP 55 - Scenario tests and stress tests - types of tests and levels of adversity

A
  1. Types of tests
    1. Deterministic - challenge insurer in specific ways based on unique exposures
    2. Stochastic - from sets of stochastically generated scenarios
    3. Combination - multiple events happen simultaneously or sequentially
    4. Reverse - reverse-engineered tests that create adverse capital event
  2. Levels of adversity
    1. Periods of normal volatility
    2. Plausible adverse conditions
    3. Tail events

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