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Risk Management -module 1 > Unit 6 > Flashcards

Unit 6 Flashcards

1
Q

4 Ts of Hazard risks

A

Tolerate- orgs readiness to bear the risk after risk treatment in order to achieve its objectives

‘Treat’ - avoid by deciding not to start or continue
- taking or increasing the risk to pursue an opportunity
- removing the risk source
- changing likelihood or consequences

Transfer- insurance or outsourcing
- can’t fully transfer- more risk sharing

Terminate - sometimes not possible ie public service

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2
Q

4/ 5 Es of opportunity risk management

A

Exist
Explore
Exit/ expand
Exploit

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3
Q

Risk control techniques

A

PCDD
Preventative; ( seg of duties) corrective; (password) detective; (bank reconciliation) directive ( follow bank procedures)

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4
Q

Hazard risks only

A

Preventative => Exit /terminate
Corrective => Treat ie move to within tolerance
Detective => Tolerate
Directive => Transfer

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5
Q

Fraud example

A

Preventative- vetting candidates, penalties on staff for breaches therefore discouraging others

Corrective- media handling to reduce rep risk, call police to remove internal fraudsters

Directive- procedures

Detective- whistlowing, review of existing suppliers for fakes

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6
Q

5 C’s of credit risk

A

Character- reputation of the company
Capital- how company is financed
Conditions - of the sector and country where the company is
Capacity- of the company to repay
Collateral- assets that the bank could claim if the company could not repay

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7
Q

Reduce portfolio risk through

A

Syndication
Whole loan sales
Securitisation
Credit default swaps

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8
Q

Credit analysis path -larger orgs or more complex

A

Business risks -
micro-industry trends, reg trends
macro- GDP, inflation, demographic trends, political stability, reg environment, legal environment

Financial risks
Micro- mgt analysis, proactive/ reactive, strategy, motivation, experience, integrity, corp governance
Macro - financial analysis- operating position, financial disclosures, financial position

Structural risks-
Micro- type of borrower, holding company, primary operating subsidiary, secondary operating subsidiary
Macro- type of borrowing, secured vs unsecured, subordinated, long or short term

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9
Q

Credit control measures

A

Repayment, restructure, reschedule

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10
Q

Market risk elements

A

Fx, interest rate, equity, commodity, credit price.

Can be general or specific to part of the market

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11
Q

Market risk measures

A

Measure through VAR, ES, stress testing and scenarios

Hedging and basis risk. Basis risk is the result of imperfect hedging.

Market risk measurement of credit risk;
CS01- credit price sensitivity to one basis point change in spread.

PV01 - calculates bond profit or loss for small changes in the risk free yield.

Duration times spread-adjust for duration-evolution on CS01.

RR05 -loss given default calculated by 1-recovery rate.

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12
Q

Liquidity risk- Basel statement

A

A bank should establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources.

Not in Pillar 1

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13
Q

Liquidity risk -Solvency 2

A

Not required risk to hold capital for but there is an expectation that firms will have enough liquidity to pay claims when they arise.
Most insurance firms run stress tests based on large claim incidents to test the adequacy of their liquidity in stressed conditions.

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14
Q

Basel 3 on liquidity risk

A

17 principles - fundamental one already written out.

• Governance- risk tolerance stated, senior management develop strategy, incorporate liquidity into internal processes

• Measurement and management

• public disclosure

• role of supervisors

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15
Q

Basel 3 re-work with 2 objectives

A
  • promote short term resilience of a bank’s liquidity risk profile by ensuring it has sufficient high quality liquid assets to survive a significant stress testing scenario lasting for one month-liquidity coverage ratio developed
  • promote resilience over a longer time horizon by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. Net stable funding ratio has 1 yr time horizon
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16
Q

Controlling insurance (underwriting and reserving) risk definition

A

Fluctuations in the timing, frequency and severity of insured events relative to the expectations of the firm at the time of underwriting that risk

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17
Q

How manage underwriting and reserving risk?

A

Re-insurance-transfer an amount of liability in the event of a claim to a counterparty. But brings credit risk to the insurer in case they default.

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18
Q

General insurance risks:

A

Re-insurance
Claims management
Underwriting
Reserving

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19
Q

Life insurance risks;

A

Longevity
Mortality
Morbidity
Persistency
Claims management
Underwriting
Product cycle
Expense

20
Q

Other insurance risks

A

Concentration
Counterparty credit risk
Market risk
Pension obligation risk
Catastrophe Risk

21
Q

Operational risk controls

A

BCP; cyber; outsourcing; insurance and risk transfer. Also;

AML
Recruitment policies
Compliance policies
Conflicts of Interest policies
HR in particular recruitment and retention policies
Control policies for key internal processes such as underwriting

22
Q

Operational risk management process

A

Identification
Assessment
Measurements
Mitigation and control
Monitoring and reporting

23
Q

Governance of Op Risk through?

A

3 LOD

24
Q

Op risk identification, assessment and measurement includes:

A

Audit oversight - usually used to supplement bottom up.

Critical self assessment (bottom up) - each unit analyses the nature of risks it faces.

Risk mapping - process flows, org units and business units to op risk types. (Bottom up)

Causal networks - map of factors that directly or indirectly cause op risk event, (bottom up)

Key risk indicators- measure the change in risk over time, indicating how risky an activity is by applying objective statistical methods. Can be both top-down and bottom-up.

Actuarial models (both top down and bottom up) frequency and magnitude of op risk losses data.

Earnings volatility (top down) backward looking measure- how much each unit earned over period of time.

25
Q

Fundamental principle of insurance and risk transfer?

A

Indemnity- put the insured back in the position (financially at least) as if the loss had never occurred. Some policies compulsory

26
Q

Types of insurance for FS firms

A

• Insurance against building damage, loss of revenue and terrorism
• directors and officers insurance
• employment practice insurance
• fidelity guarantee and crime insurance
• cyber insurance

27
Q

Reasons and types of insurance:

A
  1. Mandatory legal and contractual obligations ie employers liability, public liability, motor 3rd party etc
  2. Balance sheet/ profit and loss protection ie business interruption, asset protection, key person
  3. Employee benefit/ protection of employee assets ie life and health, directors and officers liability
28
Q

1st party versus 3rd party insurance

A

1st party- org buys insurance to cover the increased cost of operation, recover cost of repairing damage and restoring the business following a loss. Own issues

3rd party- liabilities to others. 3rd party injured person who will make the claim.

29
Q

Captive insurance companies- definition

A

Insurance company that is not otherwise involved in insurance. Org can use its internal resources to fund certain types of anticipated losses or insurance claims. 3rd party- eg extended warranty insurance policies offered by retailers of electrical goods

30
Q

Captive insurance-advantages

A
  • savings in insurance costs due to lower premiums often set
  • gain access to re-insurance markets
  • exposure to cost of insurance claims meaning org has greater risk awareness
  • greater cover
  • tax benefits
31
Q

Disadvantages of captive insurance

A
  • exposure to insurance claims otherwise paid by commercial insurance market
  • parent org to allocate capital
  • large losses paid by captive, absorbed by parent
  • compliance issues if writing business across borders
  • significant admin
32
Q

What type of control BCP?

A

Corrective.
A specific type of risk treatment to keep org operating or restore operations

33
Q

Business impact analysis definition

A

An analysis stage in the BCP cycle that analyses the effect of an interruption on our key dependencies and core processes

34
Q

BCP lifecycle has 5 components

A
  1. Identify crucial risk factors already affecting the org
  2. Understand the needs and obligations of the org
  3. Establish, implement and maintain your BCMS
  4. Measure the overall capability to manage disruptive incidents
  5. Guarantee conformity with stated BC policy
35
Q

BCP principles

A

Comprehensive
Cost effective
Practical
Effective
Maintained
Practiced

36
Q

Business impact versus BCP

A

Emphasis of a BIA is the identification of the relative importance and criticality of each function rather than BCP - identifying the events that could undermine that particular function

37
Q

BIS report on outsourcing-systems and controls:

A
  • fit with existing org
  • agreement allows monitoring
  • due diligence
  • smooth transition

Concentration risk implications

38
Q

Outsourcing reasons:

A
  • streamlining operations
  • cost control
  • freeing up resources for other work
  • improving quality and service
  • resources not available internally
39
Q

PRA CRR firm requirements

A

When relying on a third party for the performance of operational functions which are critical for the performance of relevant services and activities on a continuous and satisfactory basis, (a firm must) ensure that it takes reasonable steps to avoid undue additional operational risk and;

not to not undertake the outsourcing of important operational functions in such a way as to impair materially:
(a) the quality of its internal control; and
(b) the ability of the PRA to monitor the firm’s compliance with all obligations under the regulatory system

40
Q

PRA - Insurance firms

A

If a firm outsources a function or any insurance or reinsurance activity, it remains fully responsible for discharging all of its obligations under the rules and other laws, regulations and administrative provisions adopted in accordance with the Solvency II Directive.

41
Q

FCA expects firms to

A

• develop a security culture, driven from the top down
• have good governance around cyber security
• identify key assets and appropriate protections•
have adequate detection capabilities so firms know if they are being attacked
• have systems and controls to ensure recovery and response in the event of an attack – you will recognise the links to BCP here.

42
Q

Cyber risk-key issues for managing cyber risks include:

A
  • establishing processes that can deliver info about cyber security-and benefits- up to board level
  • establishing good communication between risk managers and information managers
  • identifying the critical information on systems that may be most at risk from cyber attacks
  • developing multiple layers of defence
  • developing controls that will detect attacks quickly
43
Q

Monitoring and review- when reviewing a control need to answer

A
  1. Is the control we chose to implement really the best control for the risk?
  2. Is the control effective in practice?
  3. Does the control provide good value for money?

Cost of risk controls-focus on critical controls

44
Q

Risk events -learning from experience

A

• why it occurred
• whether we had previously identified it as a possible risk
• why it had the impact it did
• whether we had correctly analysed it’s likelihood and impact
• how we stop it happening again

45
Q

7 functions that can be outsourced

A
  • HR
  • call centres
  • marketing
  • IT
  • finance
  • real estate management
  • distribution and logistics

Risk Management -module 1 (6 decks)

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