Brehm #1

Question 1

ERM definition

Answer 1

process of systematically and comprehensively identifying critical risks, quantifying their impacts, and implementing integrated strategies to maximize enterprise value

Question 2

Risks included in ERM analysis (2)

Answer 2

1. enterprise-wide risks

2. focuses only on material risks

Question 3

Main categories of risk facing insurers (4)

Answer 3

1. insurance hazard risk
2. financial (asset) risk
3. operational risk
4. strategic risk

Question 4

Sub-categories of insurance hazard risk and associated exposures (3)

Answer 4

1. UW - risk of non-cat losses from current exposures
2. accumulation/cat - risk of cat losses from current exposures
3. reserve deterioration - risk of losses from past exposures

Question 5

Insurance hazard risk

Answer 5

risk assumed by insurer in exchange for premium

Question 6

Financial (asset) risk (5 sources)

Answer 6

risk in asset portfolio due to volatility in:

• interest rates
• foreign exchange rates
• equity prices
• credit quality
• liquidity

Question 7

Operational risk and examples

Answer 7

risk associated w/execution of company’s business

• IT systems
• policy service systems
• people
• processes

Question 8

Strategic risk

Answer 8

risk of making the right or wrong strategic choices, refusing to choose, OR failing to recognize that choices need to be made

Question 9

Stages of ERM process (4)

Answer 9

1. diagnose - initial risk assessment
2. analyze - quantify critical risks using probability distributions of potential outcomes
3. implement - avoidance, reduction, mitigation, or exploitation strategies
4. monitor - actual vs. expected results

Question 10

Essential elements of an enterprise risk model (4)

Answer 10

1. UW risk
2. reserving risk
3. asset risk
4. dependencies (correlations)

Question 11

Components of UW risk in an enterprise risk model (5)

Answer 11

1. loss frequency
2. loss severity
3. pricing risk
4. parameter risk
5. cat modeling uncertainty

Question 12

Pricing risk definition (UW risk - enterprise risk model)

Answer 12

instability in UW results arising from variation in premium or losses (can come from mis-estimating projected losses or market pressures)

Question 13

Components of parameter risk (UW risk in enterprise risk model - 4)

Answer 13

1. estimation risk
2. projection risk
3. event risk
4. systematic risk - *all parameter risk is systematic

Question 14

Definition of parameter risk (UW risk)

Answer 14

risk of misestimation of parameters, imperfect form, and risk not modeled

Question 15

Definition of parameter projection risk in enterprise risk models and examples (3)

Answer 15

changes over time and uncertainty in projection of those changes

ex:
1. frequency trend
2. severity trend
3. loss development

Question 16

Definition of event risk in enterprise risk models and examples (5)

Answer 16

uncertainty due to events outside of company control which impact loss frequency or severity

ex:
1. class-action lawsuits
2. latent exposures
3. legal decisions on policy wording
4. new cause of loss discovered that was previously uncovered
5. new market entrant reduces rates to grab market share

Question 17

Definition of cat modeling uncertainty in enterprise risk models

Answer 17

uncertainty in probability of event and amount of insured damage

Question 18

Definition of reserving risk in enterprise risk models and impacts (2)

Answer 18

risk of reserves developing other than as anticipated

impacts:
1. amount of required capital
2. length of time capital must be held

Question 19

Capital should be sufficient to… (5)

Answer 19

1. sustain current UW
2. provide for adverse reserve changes
3. provide for declines in assets
4. support growth
5. satisfy regulators, rating agencies, and shareholders

Question 20

Common capital requirements (5)

Answer 20

1. default avoidance - hold enough capital that probability of default is remote
2. maintain financial ratings
3. continue to service renewals (which are more profitable)
4. not only survive a major cat event, but thrive in aftermath
5. maximize insurer’s franchise value

Question 21

Traditional risk management techniques (4)

Answer 21

1. risk avoidance
2. risk mitigation
3. risk transfer
4. risk retention

Question 22

Uses for enterprise risk modeling (5)

Answer 22

1. Determine capital needed to support risk, maintain ratings, etc.
2. Set reinsurance strategies
3. Plan growth
4. Manage asset mix
5. Value companies for M&A

Question 23

Most important elements for an effective enterprise risk model (4)

Answer 23

1. Model reflects relative importance of risks to business decisions
2. Modelers have deep knowledge of fundamentals of those risks
3. Model includes mathematical techniques to reflect the relationships among risks (dependencies)
4. Modelers have a trusted relationship with sr management.

Question 24

Definition of parameter estimation risk in enterprise risk models (UW risk)

Answer 24

Specifying incorrect form or model parameters

Reduced with more or better quality data but never eliminated