RiskClassification Flashcards
What is the definition of economic value?
- Embedded value comparing: a. Shareholder net assets (assets - liabilities) plus b. Value in-force(VIF) plus 2. Goodwill relating to a. The value of future new business plus b. Future initiative to drive down costs, improve persistency and improve the risk
What is VIF?
Value In-Force, the value of existing business relating to future income less costs, including the cost of capital
What is market risk?
Market movement -> asset, liability, income from asset.
What is credit risk?
Counterparty failure to perform its contractual obligation e.g. losses from downgrades
What is Insurance and Demographic risk?
Risk of adverse variation in life and general insurer and pension fund claim experience
What is operational risk
resulting from inadequate or failed internal processes, people and system, or from external events
Categories of risks covering the quantum of embedded value?
Market, credit, insurance and demographic, operational
liquidity risk
the risk that a firm, although solvent, 1. Does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost
What does strategy risk cover related to the goodwill of a firm?
Future new business as well as future projects/initiatives to a. Reduce costs 2. Improve persistency 3. Optimize risk profile
agency risk
interests of management are not aligned with the owners of a firm
How is cost of capital determined?
Not solely by the economic risks faced by a firm, but also by regulatory, accounting and rating agency requirements
friction capital
excess requirements from regulatory, accounting and rating agency over economic capital required
What does frictional risk category cover?
- Risk of friction capital 2. Problems caused by operating structure (e.g. Fungibility of capital tied up in subsidiaries) 3. Tax risks 4. Increase in economic capital requirements (e.g. an increase in the confidence level required)
What is aggregation and diversification risk?
The risk that the aggregate of risks across individual categories is greater than the sum of the individual parts and/or that anticipated diversification benefits are not fully realized.
What are subcategories of market risk?
- Equity (rate) interest 2. Interest rate risk (including real yields and implied inflation) 3. Foreign Exchange (rate) risk 4. Property risk 5. (actual) inflation risk
