Risk Classification Systems - Financial Services

Question 1

What is foreign exchange risk?

Answer 1

Loss due to adverse change in foreign exchange rates.

Question 2

What is interest rate risk?

Answer 2

Loss due to change in interest rates. Bond values increase when interest rates falls.

Question 3

What is equity risk?

Answer 3

Loss due to adverse changes in the share prices.

Question 4

What is credit price risk?

Answer 4

Risk that a long or short position in a credit risky instrument can lead to loss due to adverse market prices for that credit risk. E.g. CDS.

Question 5

What are the ways that operational loss events can be categorised?

Answer 5

1. LFLI - Low frequency, low impact
2. LFHI - Low frequency, high impact
3. HFLI - High frequency, low impact
4. HFHI - High frequency, high impact

Question 6

What types of risks might an insurer have no appetite for?

Answer 6

1. Fines
2. Failure to maintain sound systems and controls around underwriting process.
3. Damage to company brand through inappropriate acceptance of risks.
4. Non authorised classes of business being underwritten without referral to senior management.