ILA Extension Flashcards
What are 7 key indicators in the L and H Risk Control assessment? (ERM123)
- Risk identification
- Experience studies
- Risk limits
- UW standards and authorities
- Product development process and new business monitoring
- Feedback loop (experience monitoring, claims, UW, pricing, risk management)
- Pricing and valuation assumptions (prudent and refreshed frequently)
What does SCR stand for? (ERM414)
Solvency Capital Requirement, as defined by Solvency II
What is the SCR vision and how is it defined? (ERM414)
- Top-down vision
- Defined as the 1-year VaR at the 99.5% confidence level, then drills down to modules and submodules of risks that conform this vision
What is the RBC vision and how is it defined? (ERM414)
- Bottom-up calculation
- No time horizon or risk metric defined, nor confidence level. Updates are made at a component level.
How is the RBC updated? (ERM414)
By incrementalism, where new factors are being targeted to very specific risks and/or lines of business
What does RBC stand for? (ERM414)
Risk-based capital, as defined by the National Association of Insurance Commissioners
How is SCR applied? (ERM414)
Can be applied by all insurers, but insurers that meet certain qualifications are allowed to use their own risk models
What is the advantage of using a full internal model, instead of the SCR formula? (ERM414)
An insurer can simulate its losses more accurately, calculate a multivariate VaR, with a dependency structure more complicated than implied in the Basic SCR formula
What are the strengths of VaR? (ERM414)
- Easy to interpret;
- Clear connection to probability of insolvency (i.e., capital depletion);
- A lot of computational tools to calculate it efficiently.
What are the weaknesses of VaR? (ERM414)
- Risk blindness: does not reveal the shape of the loss distribution beyond that point
What are the strengths of CTE? (ERM414)
- Addresses risk blindness problem;
- Subadditivity property;
- Requires smaller confidence intervals for the same number of scenarios when using Monte Carlo
What are the weaknesses of CTE? (ERM414)
Difficult to interpret
How is risk aggregated under SCR? (ERM414)
Variance-Covariance approach ~ Gaussian Copula: Many insurers use the Basic SCR formula to calculate module/submodule VaR, and use correlation coefficients to aggregate total SCR.
How is risk aggregated under RBC? (ERM414)
Implied correlations are 0 (total independence) or 1 (perfect correlation)
What is the time horizon for RBC? (ERM414)
None. RBC is a point-in-time assessment of capital levels and a retrospective view.
What is the time horizon for SCR? (ERM414)
One-year capitalization time horizon
When is time horizon truly relevant for solvency measurements? (ERM414)
When using cash flow modeling
What is the problem with a one-year view of capital? (ERM414)
It misses latent, developing risks that build over time to affect capital
What is the problem with run-off / long term time horizons? (ERM414)
- Introduces model uncertainty;
- Practical problems with modeling extended time horizons
What is the standard scenario under RBC? (ERM414)
- Single scenario with specified assumptions independent of a company’s experience,
- Serves as a floor for the reserves and required capital,
- Provides reasonable constraints to the flexibility given to actuarial judgment when doing stochastic modeling
What are the (6) key differences between US, Canadian and SII capital regimes, as quantified in a 2009 study? (ERM414)
- Diversification credits for term-life: SII > US
- Interest rate capital: SII > (US or Can)
- Liability valuation: BE for SII, BE + Explicit PAD for Can, Implicit methodology and assumption margins for US
- UW Risks: SII > US
- SII explicit risks, US has non-explicit risk charcges
- Interest rate and Credit risks: SII > (US or Can)
What are the (3) focuses of traditional risk management? (ERM415)
- Risks insurers are underwriting
- Adequacy of reserves and reinsurance to cover unexpected losses
- Managing investment portfolio risks
Why has ERM replaced traditional risk management? (ERM415)
- To overcome limitations of traditional RM and to expand loss control capabilities,
- To develop a comprehensive mechanism to (a) identify, (b) measure, (c) mitigate enterprise-wide exposures
- Similar to traditional RM, to protect the company against tangible, knowable, and measurable risks relying on historical data
What are strategic risks, as defined by Deloitte? (ERM415)
Emerging threats that count undermine assumptions at the core of a company’s value and foundational business model





