Exam Review #1 Flashcards
Risk management standard
Are voluntary
RMM
Risk maturity model
Objective consistent tool to conduct self assessment, not a standard or process or framework ERM based Risk appetite management Root cause Performance management
Risk governance
Integrating management principals governing the organization with the RM process
ISO 31000
Applies regarding whether risk has positive or negative consequences
Can be applied to risks that have positive outcome
Risk assessment
Includes risk identification
Risk analysis
Risk evaluation
Risk criteria
Information used to evaluate the significance of an orgs risks
Can we meet strategic goals
Defined as reference standards
Supply chain risk
Associate with iSO 31000
COSO 5Components
Gorvernance Strategy Performance Review and revision Information,communication, reporting
COSO governance and culture
To do with board of directors
COSO performance
Component that refers to practices that permit organizations in all departments assess and respond to risk
Abandonment
When you eliminate the loss exposure
Cash matching
An insurer can eliminate interest rate risk. To fund liabilities in a timely manner. To achieve this we make investments hold them till maturity to match the amounts the insurer will have to pay out
Interest rate risk?
Systematic affects all orgs
The risk a bond future value will decline because of changes in interest rates
Swaps can be used to hedge
Insurers are vulnerable due to investments so use cash matching
Reinvestment risk
Not being able to earn the same rate of return from an investment
Risk based capital system
Min. Capital for Insurer to support operations
Basel 1
Capital to assets 2003
Considers relative risk of assets
Advantage of economic capital analysis
Focus attention on risks attached to activities
Ensure solvency at a given level 99% of the time
Economical capital is the amount of money you should have put away for unexpected losses ( not told to you by regulator) almost seen as overarching more than
Frequency is low amount of loss is high
Rare but deadly
Economic Capital
Amount you need to stay solvent at a given risk tolerance level
Market Value Margin
Additional payment in case reserves are inadequate, additional money for investors to be attractive
Market Value Surplus
Fair value accounting, fair value of assets minus fair value of liabilities
Value at Risk VAR
All risks together to estimate the probability liabilities will exceed the assets by various amounts over a 1 year period. VAr is used in banks know how much money they are losing
ERM 4 components
Align and integrate
Lead establish accountability
Allocate resources
Communicate and report
ERM 5 steps -Process
Scan environment Identify risks Analyze risks Treat risks Monitor and assure
Using existing processes in RM
Reduces the resistance to change from introducing new procedures
Risk Appetite
Internal Environment
Is a factor of internal environment
Selecting RM Techniques
Is based on a forecast of the frequency and severity of expected losses
KRI
Metrics used to measure uncertainty of meeting strategic objectives
Used to evaluate performance
Remember uncertainty
KPI
$ or non $ that defines how successful we will be at meeting long term goals
How is the thing performing good or bad?
Internal environment
Equipment
Systems
People
Experience
Risk Classification
Pure and speculative
Objective or subjective
Diversifiable or non
Risk Quadrants
Hazard
Operational
Financial
Strategic
Benefits of ERM
Identify key exposures
Transparency
Risk transfer negative events
Protect tangible or intangible assets
Pillars of ERM
Interdependency matters
Correlation increases risk
Portfolio theory spread of risk
Risk management process
Identify
Analyze
Decide on response
Monitoring and control
RMM
Not a standard or process but focuses on Erm based approach Risk appetite management Root cause discipline Performances management Resilience
Solvency II Pillars
Risk based capital is adequate
Higher governance
Greater transparency
Exposure
Maximum potential damage
A condition that presents possibility for loss or gain, whether or not actually loss occurs
Think about underwriting they have to think of worst case senario
Basic risk measures
Exposure Volitiity Likelihood Consequences Time horizon Correlation
Focus is on quantifying risks how much will it affect us
Regression analysis
Trend analysis used to estimate relationships between variables
EaR
Amount they will gain, amount that might change due to change in interest rates helps with planning used more commonly in Non-banking sectors
COSO vs. iSO
COSO was meant for financial controls
Typically looks at adverse price negative outcomes
BASEL II 3Pillars
Financial adequacy
Risk management
Transparency
Tolerable uncertainty
Level managers are comfortable with risks
PDCA deals with ERM framework and process
Plan Do check Act
Traditional Risk Management Process
Focus on Hazard risk only
Identify Analyze Examine feasibility Select Implement Monitor
Risk Control
Avoid preventive reduction
Usually done by ops manager or staff
Conscious act or not to act that reduces the frequency severity and makes losses more predictable
Risk Control
Avoidance Prevention Reduction Separation Duplication Diversification
Risk based auditing
Prioritize the use of internal resources in the areas the pose the greatest risk
Risk assurance
The level of confidence in the effectiveness of the org’s risk management culture practices
CRSA
A process managers perform an annual self audit to evaluate the effectiveness of business processes the Mangers do it can be expensive
Systematic risk
Risk that is common to all securities in the same class
Sarbanes-oxley act
2002 require CEO and CFO to verify quarterly and annual financials
COSO Internal Controls
Monitoring - when you check if controls are functioning measures compliance (fictious claims question)
Report certification
Think external auditors
Employees have been informed of the commitment to risk management
Pick internal audit to administer questionnaire
Structured Data
Organized into databases with defined fields
Unstructured Data
Not organized in database can include images or non traditional media
Data Science
Is useful for unstructured Data
Ways Insurer and risk manger can use data science to improve results
Discover new relationships
Descriptive Approach
Is applied when you have a specific problem
Holdout Data
Purpose is to help ensure the model is not overfitted to training data
Precision of Predictive Model
False-negatives etc.
tP divide (TP + FP)
Line up predicted yes to actual yes = TP
Number above is FP
40/ (40+5)
Find accuracy of predictive model
Actual No divide by Total
Look for larger numbers
Training a predictive model reason for cross validation
Limited amount of training data unwise not to use some of it for training because of need for holdout data
Root node
Topmost node
The most informative attribute
Cluster analysis
Identify previously unknown groupings
Leaf node
A branch of a classification tree that leads to a target variable
The last end
Lift
Percentage of positives divided by percentage expected by chance
Expected Value
Weighted Average of all possible outcomes
Empirical probability
Based on actual experience through historical data or facts
Theoretical probability
Based on theory rather than actual experiences
Think dice
Probability analysis
Technique for forecasting events
Event tree
Only accidental
Qualitative Assessment
Measures risk by significance
High medium or low
ISO 300
Sources and consequences of a risk
Risk Analysis
Quantitative analysis
Uses historical data to reach a numeric indication of the level of risk
Flip a coin
Mutually exclusive
Only one outcome
Empirical frequency pick highest number
Coefficient of variation
Compare different shapes
Means or standard deviations
=Standard deviations ➗ by mean or multiply backwards
Expected value
Weighted average
Trend analysis
Looks at patterns in past data
Regression analysis
Varies predictably with another variable
Event tree
Only success or failure
Analyze consequences of accidents rather than decisions
Differ in their purpose
Data credibility
Available data ya can accurately indicate future losses
Timing dimension
Analyze investments income and interest
Money held in reserves to pay for a loss can earn interest until the payment is made
HAZOP
Complex scientific systems Review of a process or system Team approach Experts and stakeholders Recommend solutions
Scenario analysis
Identifies various risks and projects the potential consequences of those risks
Delphi
Involves select group of experts question response cycle until consensus is achieved
Risk register
Report to depict all risk scenarios likelihood of loss or scenario and consequences
Reports in individual risks
Developed at risk owner level links activities to to a list of identified risks consolidated at enterprise level
Residual risk
The difference between optimum risk represents the risk treatment opportunity to further reduce risk
Measures the effectiveness of risk treatment
Optimum risk
Level of risk that is within the orgs appetite
Flowchart
Depicts organizations activities and processes
Income statement
If trying to find net income exposures
Balance sheet
Lists assets property values
SWOT
Strength weakness opportunities threats associated with a purchase
If looking at new product analysis of internal and external factors
Delphi
Group of experts respond to survey or inquiry
Sensitivity analysis
The effect of a change in one or more variables on the result of a financial analysis
Risk financing
Conscious act to act or not act that generates funds to pay for losses or offset the variable in cash flows
Proust
Subjective
Loss frequency and severity
