Part 1 (Ch 1 - 7) Flashcards
Strengths of the S&P ERM evaluation COCO SET UD
Components of ERM checked
Overall ERM emphasized vs. Silo approach
Classification to ease communication
Operational performance of risk controls checked
Standard criteria applied
Economic capital assessment
Transparency of ERM encouraged
Unique structure of the company is recognized
Diversification of the company’s risks considered
Weaknesses of the S&P ERM evaluation SOULS API
Specific to S&P Understanding of the company’s risk exposure may lack from ratings agency Overly optimistic Limited to insurance companies Subjectivity in complexity assessment
Costly and time consuming
Agency risk not considered
Procedures conducted not clearly explained
Impact of the addition of ERM assessment of rating outcome unsure
Themes of best-practice corporate governance APRICS
Appointment of the board Performance review of the board Remuneration of the board Independence of the board Communication with Stakeholders Statutory requirements
Role of directors in ERM: SMIRCC
Set risk appetite, strategy, policies Monitor key risks Implementation of RMF Review lessons learnt current RMF Compliance with requirements Culture establishment
The risk faced by companies LOCUM CLIMB A RED PEPERS
Liquidity risk Operational risk Credit risk Underwriting risk Market risk
Conduct risk Legal Risk Interest rate risk Moral Hazard Basis risk Agency risk Reputational risk Environmental Risk Demographic risk Political risk Exchange rate risk Project risk Economic risk Regulatory risk Strategic risk
Systemic risk main sources MILE
Market positions - share price falls resulting in further falls
Infrastructure of financial systems - dependencies on each other
Liquidity constraints - the credit crunch (lack of availability of credit)
Exposure to a common counterparty
Key components of an ERM framework CLAP TDS
Corporate Governance Line Management Analytics of risk Portfolio Management Transfer of risk Data and Tech Stakeholder Management
Components of good risk culture COCA REAP VIDOS
Consultation
Organisational learning
Communication
Accountability
Reporting on risk
Extent risk management integration
Appetite for risk
Participation is risk management across the company
Value of ERM well understood
Improvement of risk management continually done
Decision-makers are highly qualified and in the right positions
Objectives of business align with risk management
Soft and hard side of risk management appreciated
Role of risk subcommittee in ERM: ROTIC RIFS
Risk policies setting Oversight of ERM on behalf of board Treatment of key risk assess ID of key risks Compliance to GC requirements Reporting Implementation Focus on risk management Specialist knowledge on risk management provided
Role of CRO in ERM: DIME PROMO TCC
Drive buy-in to ERM Implementation Maintenance of RMF Establish Leadership of ERM Policy development and monitoring Reporting on risk Oversee other areas of business w.r.t. risk management – challenge! Models and data systems developed to monitor and manage risk Optimise risk portfolio Trends analysis of key risks and ERM approaches Capital allocation Culture risk management established
Role of Corporate Governance in ERM: CADAC SMOCAR
Compliance checks Appetite, tolerance, capacity of risk setting Direction Accountability Controls Strategies and policies to risk Monitor key risks Culture establishment Organisational structure - roles and responsibilities, board structure Alignment of interests Reporting is trustworthy and accurate
S&P measurement of of ERM Quality CCEMS
Culture Controls Extreme event management Models - Capital and risk Strategic management
Risk Control as part of ERM: MILE L
Mitigations of risks Identification of risks Limits set on retained risks and process in place to ensure this Execution of the risk management process Learning from risks
Fraud prevention
Learning from risks
Accuracy of financials ensured
Compliance ensured
Strategic Management as part of ERM: DRIP CAR
Dividend strategy
Retained risk decision making
Investment strategy
Pricing strategy
Corporate goals at risk
Allocation of capital - optimal risk-adjusted returns
Reward structure put in place
Definition of ERM: HIV TRIMS
Risk management approach containing the following elements:
Holistic approach
o Common risk measures and limits, language and culture in place
o Approach consistent across organization
o Portfolio level management: Interaction and concentrations considered
o Collaboration between all decisionmakers and experts
Integrated in all operations and strategies
Value adding
o Up- and downside considered
o A controlled risk taking environment is created
Top-down approach
o Board > CRO > RMF > Line Management
o Risk frameworks and controls created
Risk responses are in place
o Avoid, Retain, remove, reduce, transfer
Identification of risks are appropriately done
o Common risk language
o Risk taxonomy approach
Measurement to ensure proper aggregation of risks can be done
o Quantifiable and unquantifiable
o Risk measurement approaches
o Likelihood and financial impact
o Distribution of losses
Structured approach
o ID and assessment
o Treatment
o Monitor – continual improvement
o Reporting
Benefits of ERM to a business BOI CRIM CIC TEELS
Business operations improved
o Capital is managed more efficiently
o Improved loss management
o Risk response are more cost efficient (transfer, insure and pricing of risk) and rapid
o Management efficiency is better measured
Operational efficiency increased
o Consistency is risk management approach
o Information sharing of risk
o Central co-ordination or risk management activities
Informed senior management
o Trade-off between risk and return is better asses
o External factors’ impact on business understood
o Exposure to risks better understood
o Link between business growth and risk exposure
o Strategy and risk appetite aligned
Components of ERM FICMMARR
Frameworks and governance Identification of risk Classification Monitoring and Communication Measurement Assessment Responses Reporting
Causes for different capital adequacy standards for companies/parts of a company/portfolios LORIA
- Lifecyle stages may differ
- Overseas operations
- Regulatory requirements within a sector may differ
- Industries may differ
- Areas of similar sectors may differ
Similarities between Basel and Solvency RIC SIP
o Risk based approach to determine capital requirement
o Internal or external model can be used for capital calculation
o Classes of risk considered can vary
o Supervisory intervention is allowed
o Internal risk management controls considered
o Publication or risks, risk management and capital requirements done
Relationship management principles for companies with external regulators PRATAS
Proactive engagement with the regulator Reputation of company preserved Align to supervisory objectives Transparency Accountability and governance Support supervisor to formulate new policies
Assessment of risk and capital models in ERM: MARCOS DED VRAIM
o Modifications done to standard formulae
o Aggregation of model results across the company
o Reflection of primary risks faced by the company
o Complexity of the models match the complexity of the company
o Offsetting of correlated risks
o Sensitivity risk measures and other risk measures used
o Deterministic vs. Stochastic models
o External factors affecting risks considered
o Day-to-day management influenced by model results
o Validation
o Run procedures
o Assumptions
o Infrastructure that houses the model
o Mitigations integrated into models
Extreme event management components in ERM CITIES
o Contingency plans o Impact of risk measured o Transfers of risk considered o Investigate post mortems o E o Stress and scenario testing
Risk responses to key risks CUS CAS PROD
o Concentration limit o Underwriting guidelines o Stats: Portfolio VAR, Greeks, duration, convexity o Counterparty limits o AL mismatch limits o Supplier limits o Processing lag o Risk indicators like complaints o Outsourcing o Dependencies – systems and people
Economic capital as part of ERM: MERS
o Meet regulatory requirements – SCR/MCR
o Estimation of risk exposure of the company modelling
o Retain sufficient capital to cover risk
o Strategic asset allocation – maximize risk adjusted return
Why a company might choose to retain a risk EDUCT
Economical approach Diversifying effect of retaining the risk Unsuitable or unavailable risk responses Core part of the business Trivial risk
Merits of a loose governance regime REKFS EPPICS CADAC SMOCAR not executed
Rapid response to change Easy cooperation Knowledge of industry Flexibility Structure of business considered
Entry barriers - playing field not levelled Public confidence low Poor governance adopted Inaccurate communication Controls over executives will be poor Salaries poorly controlled
Merits of Statutory regulation PENI MUCIT:
Public confidence
Economies of scale
No abuse (less prone to abuse)
Independent from rest of the industry (Allows more public confidence)
Moral hazard of industry (companies may try to find loopholes in the regulation)
Unnecessary rules (not relevant to target market)
Costly (Would be passed on to consumers)
Inflexible (Rules imposed by regulator may be less flexible than self regulation)
Too far from the market to understand market specific needs
