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ERM Exam > Objective 1 > Flashcards

Objective 1 Flashcards

1
Q

What are 4 broad areas in risk identification?

(FERM8)

A
  1. RI Tools
  2. RI Techniques
  3. Assessment of risk nature
  4. Risk register
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2
Q

What are 7 risk identification tools?

(FERM8)

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

What are 7 risk identification techniques?

(FERM8)

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

What is done in the assessment of risk nature?

(FERM8)

A

Risks are assessed as quantifiable or unquantifiable

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5
Q

Provide some examples of factors included in each entry in a risk register

(FERM8)

A
  • Unique ID
  • Risk category
  • Assessment date
  • Description
  • Quantifiability
  • Likelihood
  • Severity
  • Exposure period
  • Current status
  • Scenarios
  • Related risks
  • Risk responses
  • Cost
  • Residual risks
  • Review timetable and process
  • Risk owner
  • Entry author
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6
Q

What are 2 groups of liquidity risk?

(VAR13)

A
  1. Asset
  2. Funding
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7
Q

What is asset liquidity risk?

When does it arise?

(VAR13)

A
  • Risk that the liquidation value of assets may differ significantly from the current mark-to-market values
  • Arises due to a force liquidation of assets
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8
Q

What 3 factors affect asset liquidity risk?

(VAR13)

A
  1. The price impact of trades
  2. Tthe size of the positions
  3. Prevailing market conditions

The market-impact effect can be measured using the price-quantity function

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9
Q

Describe the price-quantity function and it’s relationship to (a) deep markets and (b) thin markets

(VAR13)

A
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10
Q

What is one way to control asset liquidity risk?

(VAR13)

A
  • Through position limits, where the exposure to a single instrument is limited
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11
Q

What is funding liquidity risk?

(VAR13)

A
  • a.k.a., cash flow liquidity risk
  • Arises from the liability side of the BS
  • The inability to meet payment obligations to creditor or investors can force unwanted liquidation of portfolio
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12
Q

What 3 factors affect funding liquidity risk?

(VAR13)

A
  1. Leverage
  2. Changes in collateral requirements
  3. Mismatches in timing of payments
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13
Q

What are 5 ways to defend against funding liquidity risk?

(VAR13)

A
  1. Cash
  2. Line of credit
  3. Fund-raising from other sources (i.e., new debt/equity)
  4. Evaluate the likelihood
  5. Avoid debt covenants or trigger options
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14
Q

How is asset liquidity risk assessed?

(VAR13)

A
  • Factored into VAR measures, ensuring the horizon is >= orderly liquidation period
  • Longer liquidation periods are taken into account by increasing volatility
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15
Q

What are 3 traditional ways to incorporate liquidity in valuation?

(VAR13)

A
  1. Treat the additional term as a loss (L1 or L2)
  2. Use a conservative basis (i.e., mark the portfolio to the bid/ask prices accordingly)
  3. Apply reserves (i.e., reserve amount is based on judgments about the liquidity of a market)
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16
Q

What are 3 liquidity-adjusted VARs?

(VAR13)

A

1. Fixed spread version

LVAR = VAR + L1 = (Waσ) + (1/2)(WS)

2. Variable spread version

LVAR = VAR + L2 = (Waσ) + (1/2)[W(S* + aσS)]

3. with Transaction costs

LVAR = a sqrt[V(W)] + C(W), where V(W) = σ2q2P02 = σ2W2

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17
Q

What are immediate liquidation and uniform liquidation?

(VAR13)

A
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18
Q

What is the half-life strategy?

Why use it?

(VAR13)

A
  • The portfolio liquidation (over time) strategy where half of the portfolio is liquidated at any point in time
  • It minimizes LVAR
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19
Q

How is funding liquidity risk assessed?

(VAR13)

A
  • Evaluated by comparing amount of cash in hand to future payment obligations:

Cash/Funding Liquidity Ratio = Cash Equivalent / Funding VAR

where Funding VAR = aσW

  • Involves examining the asset-liability structure and potential demands on cash and other sources of liquidity
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20
Q

What are 4 modes of “environmental scanning”?

(ERM107)

A
  1. Formal search (specific info, specific issues)
  2. Conditional viewing (pre-selected info, unidentified issues)
  3. Informal search (non specific info, specific issues)
  4. Undirected viewing
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21
Q

What is one way to scan the environment, in terms of the type of risks?

(ERM107)

A

1. General environmental risks

  • PESTEL framework

2. Industry risks

  • Porter’s five-forces model
  • Porter-s national diamond model
  • Industry network structures
  • Competitive analyses
  • Mapping of strategic groups
  • Market segmentation

3. Company risks

  • McKinsey 7S model
  • Value-chain analysis
  • VIRO framework
  • Analysis of core competencies
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22
Q

What is included in Porter’s Five Forces Model?

(ERM107)

A
  1. The threat of new entrants
  2. The bargaining power of buyers
  3. The bargaining power of suppliers
  4. The threat of substitute products or services
  5. The intensity of competition in the industry
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23
Q

What is the advantage of developing a common risk management language?

What are 4 broad categories of common risk management language?

(ERM107)

A
  • Ensures a more consistent way of looking upon and analyzing risks across the organization
  • They include:
    1. Strategic risks
    2. Hazard risks
    3. Financial risks
    4. Operational risks
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24
Q

How is strategic analysis summarized?

What are the shortcomings of this summary?

(ERM107)

A
  • It is summarized in a SWOT analysis
  • Although it can identify important risk factors, it does not explicitly state the relative importance amongst them- can be alleviated by a risk map
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25
Q

Describe a risk map

(ERM107)

A
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26
Q

Descripe a risk timing graph

(ERM107)

A
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27
Q

What is an influence matrix?

Describe how to build an influence matrix.

(ERM107)

A
  • Qualitative evaluation of the interaction between risk factors, which pinpoints the risks that have the greates potential impact
  • Follow 3 steps:
    1. Assign how row y impacts column x from 0 to 2
    2. Sum values across columns (left-right) to get the total value
    3. Sum values across rows (top-down) to get the passive score
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28
Q

What are the major steps to create a scenario planning?

(ERM107)

A
  1. Identify key environemntal risk factors
  2. Elaborate major themes that may characterize future competitive developments
  3. Create environmental scenarios based on the major themes (e.g., a 2x2 matrix of combinations of 2 major themes)
  4. Evaluate key strategic risk factors in various scenarios (e.g., common risk factor across the 2x2 matrix)
  5. Formulate strategic alternatives/options and evaluate them in different scenarios
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29
Q

What are the benefits of scenario planning?

(ERM107)

A
  • Helps managers evaluate robustness of strategic alternatives
  • Develop response capabilities for future unexpected events
  • Improve future performance through structure thinking around possible scenarios
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30
Q

What are the tools and approaches used to handle different images of risk?

(ERM107)

A
  1. Traditional planning tools (can be complemented with scenario planning / real options)
  2. Scenario analysis
  3. Continency planning (useful for pre-defined/predictable risks)
  4. Real options (can be created via planned trails or autonomous experiments)
  5. Mindfulness
  6. Learning and selection (can include trails to test alternative solutions)
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31
Q

What are the 2 primary goals of effective ERM?

(ERM117)

A
  1. To identify, evaluate, and quantify (if possible) risks and their correlations/dependencies from all sources across an organization
  2. To ensure the organization actively implements risk treatment strategies that leverage knowledge of its risks to achieve appropriate risk and return tradeoffs in accordance with an organization’s values and goals
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32
Q

What are 3 key concepts of an ERM framework?

(ERM117)

A
  1. A core risk culture, risk organization, and risk governance
  2. An iterative process (a.k.a., an ERM control cycle) of:
    • identifying and evaluating risks,
    • setting risk treatment strategies,
    • monitoring results
  3. Recognition of external impacts and influences from:
    • the economy,
    • the marketplace,
    • the views of regulators, the investment community, and rating agencies
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33
Q

Describe how the 3 key concepts of an ERM framework are illustrated

(ERM117)

A
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34
Q

What are the building blocks of ERM?

(ERM117)

A
  1. Risk identification and categorization
  2. Risk evaluation
  3. Risk treatment
  4. Strategic treatment of risk
  5. Risk monitoring
  6. External impacts and influences
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35
Q

What are 5 characteristics of an insurance organization’s risk identification process?

(ERM117)

A
  1. Comprehensive (covers all material and emerging risks)
  2. Inclusive (all risk-taking functions of the org are involved)
  3. Efficient (balance bottom-up and top-down processes)
  4. Consistent (common framework)
  5. Focused (qualitative, quantitative assessment and prioritization)
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36
Q

What are some sources to scan for emerging risks?

(ERM117)

A
  1. Attending industry conferences
  2. Researching industry and academic journals
  3. Serving on industry committees
  4. Conducting discussions with industry experts
  5. Conducting comparative analysis of risks disclosed by competitors
  6. Understanding general socio-economic and technological trends
  7. Reading ERM surveys and analyses
  8. Introspective review of the exposures, claims, policyholder populations, terms and conditions of the policies written, etc.
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37
Q

What are senior management risk workshops for?

What are 4 important considerations?

(ERM117)

A

It is an effective method to identify enterprise-wide risks if performed periodically.

Includes:

  1. Workshop participants
  2. Advance communication
  3. Risk registries, assessment surveys, or interviews
  4. Workshop itself
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38
Q

What are common risk quantification methods (within the risk evaluation step)?

(ERM117)

A
  1. Stress tests
  2. Reverse stress tests
  3. Stochastic models
  4. Reference to standard measures
  5. Hybrid methods
39
Q

What are some challenges of statistical measures that capture dependencies between risks (e.g., correlations and copulas)?

(ERM117)

A
  • Limited to compound interactions that are remote but possible
  • Data limitations may be difficult to implement and understand
40
Q

What does RAROC stand for?

How is it calculated?

(ERM117)

A

Risk-Adjusted Return on Capital

RAROC = (Net Income - Risk Adjusted to Net Income) / Available EC

41
Q

What does RORAC stand for?

How is it calculated?

(ERM117)

A

Return on Risk-Adjusted Capital

RORAC = Net Income / Required EC

42
Q

What does RARORAC stand for?

How is it calculated?

(ERM117)

A

Risk-Adjusted Return on Risk-Adjusted Capital

RARORAC = (Net Income - Risk Adjustment to Net Income) / Required EC

43
Q

What does ROE stand for?

How is it calculated?

(ERM117)

A

Return on equity

ROE = Net income after tax / Shareholder Equity

44
Q

What does ROA stand for?

How is it calculated?

(ERM117)

A

Return on Assets

ROA = Net Income / Assets

45
Q

What are 6 uses of EC Models?

(ERM117)

A
  1. Assessing capital adequacy relative to regulatory requirements
  2. Determining appropriate risk treatment strategies
  3. Analyzing financial performance (i.e., setting targets and qualitative feedback)
  4. Align pricing with risk-adjusted metrics
  5. Developing business strategies by determining aggregate risk relative to risk appetite
  6. As a risk metric to determine relative risk and reward
46
Q

Under the “strategic risk treatment of risk” ERM building block, what are the 7 suggested risk mitigation strategies?

(ERM117)

A
  1. Insurance or reinsurance
  2. Hedging
  3. Capital market products and alternative risk transfer (ART)
  4. Implementation of policyholder awareness, education programs or loss control measures
  5. Changes in governance or process controls
  6. Changes in business mix, distribution, or target markets
  7. Exiting specific markets and products, or reducing coverage
47
Q

Under the “risk monitoring” ERM building block, what are 4 examples of metrics that can be used for monitoring risk?

(ERM117)

A
  1. Accounting ratios, e.g., liquidity ratios
  2. Statistics, e.g., combined ratios
  3. Asset and liability durations
  4. Risk measures, e.g., EC or coefficients of variation
48
Q

What are KRIs?

What do KRIs enable?

(ERM117)

A
  • Key Risk Indicators
  • If mapped to specific risks, they enable:
    • active monitoring of potential losses or increasing exposures, facilitating risk mitigation decisions,
    • easy measurement,
    • integration with regular risk assessments, dynamically updated,
    • provide significant risk-related insights to management of a BU.
49
Q

What is risk taxonomy?

(ERM127)

A

It categorizes and describes all the major risks that may be faced by a firm

50
Q

How are external risks classified?

(ERM127)

A
  • Financial market risk
    1. Stock market risk
    2. Interest rate risk
    3. Exchange rate risk
    4. Credit risk
    5. Spread risk
    6. Systemic risk
    7. Liquidity risk
  • Political and regulatory risk
  • Macro-economic risk
    1. Business cycles
    2. Inflation risk
  • Environmental risk
51
Q

How are internal risks classified?

A
  • Operational risk
    1. People risk
    2. IT risk
    3. Project risk
    4. Legal risk
    5. Pricing risk
    6. Process risk
  • Strategic risk
  • Reputational risk
52
Q

How do movements in interest rates affect insurers?

(ERM127)

A
  • Liabilities may move less/more than the value of the supporting assets, potentially creating losses
  • Annuities’ and pensions’ payment streams are highly interest-sensitive
53
Q

How do movements in interest rates affect investor behaviors?

(ERM127)

A

High interest rates:

  • Demand for fixed interest instruments, creating downward pressure on prices of stocks and other assets
  • Reduce savings of individuals who need to borrow cash for loans and mortgages
  • House prices and markets can become depressed

Low interest rates:

  • Discourage savings and other investments
54
Q

What are 3 types of exchange rate risk?

(ERM127)

A
  1. Transaction risk - exposure to contractual obligations specified in different currencies
  2. Economic risk - exposure to exchange rate fluctuations
  3. Translation risk - exposure to requirements of financial reporting with assets and liabilities in different currencies
55
Q

What are 5 types of market credit risk?

(ERM127)

A
  1. Bond default risk - bond issuer is unable to pay some or all payment of outstanding loan
  2. Credit downgrade risk - possible change in value of bond investments due from change in credit rating
  3. Sovereign risk - full or partial default by a country
  4. Credit default risk - debtor is unable to repay some or all the amount owed
  5. Counterparty risk - counterparty fails to meet its obligations through default of other reasons, associated with concentration risk
56
Q

What is inflation risk?

(ERM127)

A

Reduction in real returns because of falling purchasing power of cash, much more of an immediate issue in the developing world (therefore connected with the exchange rate risk)

57
Q

What are the 2 interpretations of environmental risk?

(ERM127)

A
  1. Environemntal changes could impact the operations of the enterprise (e.g., severe weather causes disruption)
  2. Environmental risk is the risk arrising from environmental liability
58
Q

What are 7 key IT risks?

(ERM127)

A
  1. Accidental loss or corruption of data
  2. Viruses
  3. Unidentified bugs in programs
  4. Theft of data or intellectual property throgh system security breaches
  5. System failure from inadequate capacity
  6. Outages and interruptions to service
  7. Failure of suppliers
59
Q

What are 4 key risks in projects?

(ERM127)

A
  1. Scope risk - project goals are changed during implementation
    • May arise from (A) scope creep or (B) gap risk
  2. Defect risk - risk that hardware or software acquired does not meet project needs
  3. Schedule risk - risk of loss due to schedule failure
  4. Resource risk - risk of loss due to resources not being available
60
Q

What are 2 key legal risks?

(ERM127)

A
  1. Risk of lawsuit
  2. Defective contracts (i.e., contracts are not legally enforceable)
61
Q

What are 4 reasons for underpricing?

(ERM127)

A
  1. Exchange rate risk
  2. Model risk and parameter risk
    • Assumptions could be wrong
    • Model inadequately captures risks
    • Parameters used are inadequate
  3. Adverse experience
  4. Adverse selection
62
Q

What are 3 categories of process risk?

(ERM127)

A
  1. Health and safety
  2. Manufaturing and engineering
  3. Model risk
63
Q

What are some examples of the issues identified in BP’s case?

(ERM127)

A
  • Project or Engineering Risk - defective components
  • People Process Risk - insufficient training
  • Engineering Process Risk - flawed maintenance of electrical equipment
  • Engineering Process Risk - human error
  • Health and Safety - flawed process due to lack of safety management system
  • Strategic Risk - lack of culture that emphasizes safety
  • People Risk and Model Risk - human error rejected findings of modeling software
64
Q

What were 4 costs for BP?

(ERM127)

A
  1. Plunged share value
  2. Boycotts impacted BP’s retail gas stations through the US
  3. Billions of dollars of fines and compensation
  4. Investment in major advertising campaign to recover their reputation
65
Q

What were the key risks in Northern Rock?

(ERM127)

A
  1. Systemic risk - financial crisis lead to dried up deposits
  2. Liquidity risk - depositors wanted to take cash, but the assets were in mortgages
  3. Interest rate risk / Spread risk - mismatch between the assets and liabilities
  4. Strategic risk - lack strategic risk management lead to misassessment of strategy of growth through leverage
66
Q

What is the role of an insurer board?

(ERM702)

A
  1. Approve the overall risk management strategy and/or policy
  2. Oversee the process of ensuring the insurer’s responsible persons are fit and proper
  3. Setting the risk appetite of the insurer
  4. Monitor key risks by insuring the implementation of a suitable risk management framework
67
Q

What is a risk committee (RC)?

What is its objective?

(ERM702)

A

A dedicated committee to focus on matters related to risk management, established by the Board.

Its objective is to assist the Board of Directors by:

  • exercising due care, diligence and skill in relation to the effective risk management of major risks to which the insurer is exposed to
  • verifying that the insurer’s risk management and internal control systems are adequate and functioning effectively
68
Q

What are 5 considerations to have an effective risk committee?

(ERM702)

A
  1. RC have a diverse background and appropriate qualifications
  2. Ensure RC “asks questions” of the reports submitted, and of management
  3. Ensure RC have support of the Board and the appropriate level of management
  4. Consider the appropriateness of the level and volume of reporting to the RC
  5. RC should be responsible for keeping track of leading practices, trends and aiming to improve the organization’s risk management process
69
Q

What are 5 considerations for KPIs in the self-assessment program for Risk Committees?

(ERM702)

A
  • Specific
  • Measurable
  • Achievable
  • Realistic
  • Time-bound
70
Q

What is the critical link between the Board and management?

(ERM702)

A

The CEO

71
Q

What are the key duties/considerations of the CRO?

(ERM702)

A
  1. Bring risk-related functions and specialist under a common framework and structure
  2. Take actions on the risk-management related issues
    • Set risk tolerance
    • Align incentives to risk appetite
    • …
  3. Establish the insurer’s performance drivers and key internal/external stakeholders
  4. Establish a friendly relationship between the CRO and CFO because they share the objectives of improving earnings predictability and limiting exposure to adverse variations in earnings
  5. Facilitate the dialogue and debate at management and board level about the insurer’s risk tolerance
  6. Have visibility and authority
  7. Be the coordinator of risk activities and measurement at the company level
72
Q

What are the considerations for setting a management oversight structure?

(ERM702)

A
  1. Transparency of decision making process
  2. The size and nature of the insurer
  3. The mix of risks faced by the insurer
73
Q

What are 6 items needed for an ERM framework?

(ERM702)

A
  1. Consistently applied “business unit engagement processes”
  2. Common risk language
  3. Standard risk management processes
  4. Agreed risk behaviors / culture
  5. Appropraite reward / compensation systems
  6. Clear reporting and monitoring
74
Q

What are 6 problems of using different risk management languages?

(ERM702)

A
  1. Inhibits business management buy-in and the task of embedding ERM
  2. Reinforces a silo approach
  3. Focuses on form over substance, which may result in real risks not being identified
  4. Proliferates process inefficiencies and duplication
  5. Difficults aggregating risks across categories due to inconsistent measurement of risks
  6. Creates extra cost for the business and impacts performance outcomes
75
Q

What are 4 considerations associated with a common risk management language?

(ERM702)

A
  1. Universally understood top-down risk rating system
  2. Rating system that relates risk rating to the level of management action to mitigate the risk
  3. Standard templates for use across the insurer and common risk categories
  4. Reporting and escalation thresholds
76
Q

What are 5 benefits of using a common risk management language?

(ERM702)

A
  1. Allows for the correct identification and classification of real risks
  2. Enables the organization to take an enterprise-wide view of risk management
  3. Promotes awareness that all risks have been defined, classified and assessed consistently
  4. Meets increasing global supervisory requirements
  5. Avoids unnecessary costs due to process inefficiencies and duplication
77
Q

What is the key issue of a risk management culture?

(ERM702)

A

Whether it:

  • supports the appropriate goals, activities and outcomes, and
  • mitigates the risks of not achieving desired outcomes
78
Q

What are 3 advantages of being proactive?

(ERM702)

A
  1. Risks could be prevented or detected earlier, when they’re smaller and less costly to remediate
  2. Encourages speaking up about things that “are not right”, which will enable speedier detection of issues
  3. Supports innovation by hearing about ideas for improvement
79
Q

What are 6 steps to develop proactive risk management culture?

(ERM702)

A
  1. Include proactive principles in the Risk Management Strategy and Group Policies and Practices
  2. Set the corporate risk goal for senior managers based in improving the risk culture index
  3. Include proactive behaviors in role definition, performance management, and development processes
  4. Develop training programs for managers and staff in face to face and online/blended formats and include the proactive principles in other training
  5. Place information on the company intranet including incident reporting portals
  6. Create measurable progress
80
Q

What are 7 considerations of developing an implementation plan of a culture component of ERM?

(ERM702)

A
  1. Consider and develop a risk management behavioral model that suits the insurer’s broader culture and operating environment
  2. Secure support of senior management and development of their risk awareness
  3. Ensure that the right behaviors are embedded in the design of frameworks and processes
  4. Design an implementation plan over a realistic time frame, appropriately resourced
  5. Reinforce behaviors through multiple influencing channels
  6. Benchmark behaviors before starting the implementation program and assess the progress
  7. Link the measures to business outcomes to prove the value add of the desired risk management culture
81
Q

What are 4 practices that suppor the integration of the upside and downside risks?

(ERM702)

A
  1. Ensure the risk function is involved in strategic planning
  2. Include both risks and opportunities in reports prepated by risk functions and internal audit functions
  3. Develop reward systems that encourage calculated risk taking
  4. Report on emerging, industry-wide, cross-border, and longer term risks
82
Q

What are 6 considerations when constructing incentive programs?

(ERM702)

A
  1. Get the balance right of the size of the incentive vs motivation
  2. Decide which individuals or groups to include
  3. Establish clarity about what to measure
  4. Make linkages between risk management performance and talent management/capability development processes
  5. Ensure that incentive programs are targeted at the appropriate level of staff
  6. Ensure that they do not have unitended consequences
83
Q

What are 3 components of risk reporting?

(ERM702)

A
  1. Current and emerging key risks in the business and within the wider environment, and changes over time
  2. Changes in risk indicators
  3. Capability for identifying and managing risks
84
Q

What are the 6 key categories of a risk dashboard?

(ERM702)

A
  1. Top 10 residual risks
  2. Key risk indicators
  3. Scoring chart for risk severity and control effectiveness
  4. Heatmap of all substantial inherent and residual risks
  5. An additional commentary section
  6. Significant project progress
85
Q

What are the potential conflicts of internal audit?

What is the best practice when it comes to internal audit?

(ERM702)

A

Potential conflicts include:

  • May deliver short term assurance benefits, but not longer-term
  • Can potentially undermine the necessary independence of the internal audit function
  • Can send the wrong message to the organization that ERM is assurance/compliance

Best practice is to clearly delineate the roles of internal audit and the function tasked with developing and maintaining an insurer’s ERM framework

86
Q

What does a risk management policy include?

(ERM702)

A
  • Outlines the way in which the insurer manages each relevant and material category of risk, both strategically and operationally
  • Describes the linkage between:
    • Insurer’s tolerance limits
    • Supervisory capital requirements
    • Economic capital
    • Process and methods for monitoring risk
87
Q

What are 15 considerations in formulating a risk management policy?

(ERM702)

A
  1. A clear risk management policy
  2. The relationship between risk management and the insurer’s purpose or mission, values, and strategic objectives
  3. How risk management is embedded in the related processes of capital management, pricing, reserving, and performance management
  4. Scope of activities to which the policy applies
  5. Appropriate supervisory requirements and considerations
  6. Requirements with respect to acquisition of new business
  7. Categories of risk and risk definitions, and how these map to internationally accepted categories/definitions
  8. Define risk terminology used
  9. Risk apettite should be set forth for furhter discussion on risk tolerance
  10. Governance and oversight aspects
  11. Behavioral expectations of all staff
  12. Minimum process-level requirements that apply universally across the operations of the insurer
  13. Requirement for the conduct of the insurer’s own risk and solvency assessment
  14. Specific requirements attaching to defined risk categories
  15. The process for reviewing and updating the policy
88
Q

What is the risk tolerance statement?

What does it include?

(ERM702)

A
  • Sets overall quantitative and qualitative tolerance level, based on the insurer’s strategy
  • It defined tolerance limits (applicable to BU plans) for each relevant and material category of risk
89
Q

What is the difference between risk tolerance and risk limits?

(ERM702)

A
  • Risk tolerance -
    • A higher-level statement that considers broadly the levels of exposure to risks that the Board deems acceptable
  • Risk limits -
    • Narrower, at the risk category level
    • They set the acceptable level of variation around objectives associated with an insurer’s annual business plan and budget
    • They translate the risk tolerance into language that can be used on a day-to-day basis
90
Q

What are the 12 parameters used to articulare risk tolerance?

(ERM702)

A
  1. Lines of business
  2. Earning volatility
  3. Requirements to meet supervisory criteria
  4. Desired capital strength
  5. Maintaining levels of EC
  6. Maintaining a buffer level of capital in excess of the minimum supervisory capital
  7. Maximum exposure to aggregation of risk
  8. Dividend paying capacity
  9. The maximum net loss accepted
  10. Minimum acceptable pricing principles
  11. Descriptions of unacceptable operational risk scenarios
  12. Setting go/no-go criteria for corporate transactions and strategic projects
91
Q

What is the role of the feedback loop in risk responsiveness?

(ERM702)

A

The feedback loop enables the insurer to take the necessary action in a timely manner in response to changes in its risk profile, based on appropriate and good quality information

92
Q

What are the 3 components of an effective feedback loop?

(ERM702)

A
  1. Establish thresholds for reporting significant issues
  2. Create protocols for escalation of issues to various levels of management
  3. Report risk aggregations to identify where limits (and potentially risk tolerance) may have been exeeded
93
Q

What are emerging risks?

Why are insurers interested in them?

(ERM702)

A
  • Thet are risks that are developing subject to uncertainty and ambiguity, difficult to quantify using traditional risk assessment techniques
  • Insurers are interested because:
    • they influence the organization strategy
    • they impact the performance of UW portfolios
    • they impact operational risks
    • they present opportunities

ERM Exam (6 decks)

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