Risk Management Flashcards
Describe Role of Risk Management Function
Risk Management Function
GOI 3 requires a formal risk management function
• Assist board and senior management develop and maintain a risk management system to identify, assess, monitor and mitigate risks
Provide assurance that adequate systems have been established, implemented and maintained to:
• identify individual / aggregated risks
• assess monitor and help manage identified risks
• gain an aggregate view of risk profile
• ORSA – forward looking assessment of risk profile and financial position, including scenario analysis and stress testing, against insurer risk appetite/ limits
Assess appropriateness of risk policies, process and controls
Must:
• Provide written reports to senior management on risk profile, exposure and mitigation
• Document and report material changes affecting risk management system
• Have access to and report to board of directors/ risk management sub committee
Describe Role of Actuarial Management Function
GOI 3 requires actuarial function
-Express an opinion to board on reliability and adequacy of TP, MCR and SCR calculation:
• appropriateness of methodology, models and assumptions
• sufficiency and quality of data
• Best estimate assumptions vs experience
• appropriateness of assumed management actions and risk mitigation instruments effects
• -appropriateness of approximations due to insufficiency of data
Express an opinion on: • ALM policy • Underwriting policy • Reinsurance and risk transfer policy • Adequacy of reinsurance and risk transfer
Assist and provide advice to board on:
• If standardized formula is used, why this is an accurate reflection of risk profile, risk appetite and business strategy
• Use and development of models e.g. for ORSA
• Financial soundness position and declarations of dividends
• Actuarial matters in ORSA
• Internal controls relevant to actuarial matters
• Awarding of bonus or similar in accordance with PPFM
• Actuarial soundness of terms and conditions of insurance contracts
Describe the Risk Management strategy and policies
- Sets out risks insurer I willing to retain and manage. Material risks that are central include lines of business and mix of insurance risk, insurer is targeting.
- Must have enterprise wide focus, address all sources of risk not just insurance
- Documented strategy:
• must identify objectives
• describe current and material emerging risks
• list policies and producers for dealing with risks
• summarise roles of risk management
• process for change/deviations from risk management or appetite
- Must be consistent with nature, scale and complexity of business- Clearly defined risk appetite, quantifying levels of risk retained.
• Must specify:
• Overall level of risk
• For material risks, the max level insurer is willing to operate with
- Clearly defined risk appetite, quantifying levels of risk retained.
- Must be reviewed regularly and updated for emerging risks
- material changes must be approved by board and documented. Must be made available for internal, external and PA review
- Risk management strategy must be supported by processes with respect to the risk appetite statement for :
• ensuring risk limits are set at appropriate levels, based on an estimate of the impact of a breach of a risk limit and the likelihood each risk is crystallized
• Monitoring and reporting compliances of risk limits and take action if limit is breached
• Review of risk appetites and statements and timing thereof
- Must have following policies at a minimum: • ALM • Capital Management • Concentration • Credit • Fitness and proper • IT • Insurance fraud • Investment • Liquidity Management • Operational • Outsourcing • Reinsurance and other forms of risk transfer • Remuneration • underwriting
ALM
- Specify nature, role and extent of ALM and relation to pricing, product development and investment function.
- Co-ordinate management of risks associated with assets and liabilities with complexity of those risks
- Recognize interdependence between assets and liabilities, take into account correlation of asset classes and correlation between products and lines of business.
- Take into account off balance sheet exposures, contingency risks that have been transferred may revert back to insurer.
Capital Management
PSI EAR
- Provide for capital planning process
- Set out strategy for maintaining adequate capital targets, taking into account insurers ORSA reviews, risk profile, risk appetite and regulatory capital requirements.
- Identification and measurement of risks that may result in capital shortfalls.
- -Establish procedures for monitoring the insurers compliance with regulatory and internal targets, as well to alert management of breaches or targets
- Set out actions to take when shortfalls occur/likely to occur
- Management and review of capital and capital management process, independent review
PSI EAR P- Process S- Strategy I - Identification E- Establish monitoring A- Actions R- review
Concentration
- Identify relevant sources of concentration risk, actions and strategies so that these remain in within established limits
- -Analyse correlation between concentrated exposure
Insurance fraud
- Outline strategies to deter, prevent, detect , report and remedy insurance fraud
- appropriate strategies for managing fraud risk and risk to financial soundness caused by fraud
- Take into account how fraud risk management may be enhanced by contributing to industry wide initiatives
- Provide for prompt reporting of fraud to regulatory authority.
Investment
- Specify nature, role and extent of investment activities and how compliance with FSi’s will be ensured
- Strategy for investing including specifying asset allocations. How these will be managed and relation to ALM policy
- Risk management procedures for less transparent classes of assets, where regulation or governance is low
- Take into account any other factors which may affect long term performance of assets, including ESG
- Prudent Person Rule:
• Invest in assets whose risks can be identified, monitored and reported on
• Invest in assets appropriate to nature, duration of liabilities and policyholders best interest - Invest in a manner that ensures security, quality, liquidity and profitability of the whole portfolio
- Assets not traded on a regulated financial market kept to prudent levels
- Diversify in a manner that avoids excessive reliance on any particular asset. Issuer or group of companies, or geographical area and excessive concentration risk in portfolio
- Manage or avoid conflicts on interest so that investment is made in best interest of policyholder
- Where unit linked liabilities are held, insurance obligations should be as closely represented to units as possible. Where based on an index it should track that index as close as possible.
- Where investment performance is guaranteed, appropriate assets support guarantee.
Operational
- Set out approach to identification, assessment, monitoring, management and reporting of relevant operational risk exposures i.e. inadequate or failed internal processes, people or systems or from external events.
- To extent available, use quantitave data to quantify operational risk. Where possible and legal, share data with industry to help quantify operational risk.
Reinsurance and other forms of risk transfer
Trscel
- Outline Strategies and procedures for selection of suitable reinsurance programs and other risk transfer, proportionate to nature, scale and complexity of insurer and to the capabilities of the insurer to control the risk transfer technique used.
- Ensure transparent reinsurance and other risk transfer arrangements that enable the PA to understand the impact of economic exposure
- Provide for processes and procedures that ensure that strategies in above are implemented/complied with and insurer has in place appropriate system and controls over it`s risk transfer transactions.
- Identify level of risk transfer appropriate to risk appetite and types of reinsurance and other risk transfers appropriate to effectively manage risk profile.
- Principles for selecting, and assessing the appropriateness, creditworthiness and diversification of, reinsurance and other risk transfer counterparties
- Set concentration limits for credit risk exposure to reinsurance and other risk transfer counterparties and systems for monitoring exposures
- Establish procedures for assessing the effectiveness of risk transfer
- Liquidity management for timing mismatch between claim payments and reinsurance and other risk transfer recoveries.
Trscel T- Transparency R- Risk Appetite S- Selection C- Concentration E- Effectiveness l- Liquidity
Underwriting
CIPLA DC
Identify the nature of the insurers insurance business including but not limited :
• to classes of insurance to be underwritten
• The types of risks that may and may not be underwritten
-Describe the formal risk assessment process for underwriting, including but limited to:
• Criteria used for risk assessment
• Method for monitoring experience
• Method by which emerging experience is taken into account
- Establish decision making proceses and controls where non-mandated intermediaries or underwriting managers perform binder functions in accordance with part 6 of the regulations of LTIA
-set out actions to be taken to asses and manage risks of loss or adverse changes in insurance/reinsurance liabilities from inadequate pricing and provisioning assumptions
-Establish approach to assumption setting, with level of conservatism will align with risk appetite
-The relevant data to be considered in underwriting and reserving process
- Regular review of adequacy of claims management procedures, the extent to which the cover the overall claims cycle.
CIPLA DC C- Clasess I -Intermediatries P- Process L- Loses A - Assumptions D- Data C- Claims mangement
Describe a longevity Swap
- Removes uncertainty around the cost of providing immediate annuity, by fixing cost
- Two counter parties, Life Insurer and Reinsurer or Bank
Fixed leg- Life insurer pays a series of fixed payments, agreed at start
Floating leg- pays series of floating payments linked to actual annuity payments
-Default risk introduced → collateral mechanism
-collateral mechanism: takes into account the value of swap at any given date i.e. PV of floating payments less Fixed . If positive, Life insurer would require. If negative counter party would require. Collateral calculated on regular basis. - Need to agree on discount rate and mechanism to determine life expectancy.
