Chapter 28: Accepting risk

Question 1

Factors that influence risk appetite

REC SCANR LUL

Answer 1

• Regulatory control
• Existing risks faced
• Culture of individual/company
• Size of the company
• Current level of capital
• Other aspects (e.g. mutual/proprietary, level of capital, parent/subsidiary…)/ Ability to alter/reduce financial consequences
• Nature of business
• Risk attitude of stakeholders
• Local or international
• Upside of risk
• Level of capital available

Question 2

Quantified definition of Risk appetite SECES:

Answer 2

• Solvency level
• Earnings / ROE / Ability to pay dividends
• Credit rating
• Economic value
• Statistical measure of risk (VaR, volatility, Ruin Prob)

Question 3

Insurable risk criteria:

FIA MUDPIS

Answer 3

• Financial/quantifiable- quantifiable loss (sufficient data)
• Interest in the risk being insured (from policyholder perspective) - indemnifies the insured, insurance not for profit making, protection
• Amount payable relates to size of loss - profit principle
• Moral hazard eliminated (as far as possible)
• Ultimate limit on liability payable- upper limit to the insured amount enable liability valuation
• Data available for accurate pricing
• Pooling large number of homogeneous risks - partial funding of risk is possible
• Independent risk events insured. (catastrophe risk, easier stats done)
• Small probability of occurrence- high risk events are not cost effective. Meaning that people can save the money rather than taking out insurance on it.