ERM Ch.1

Question 1

Key aspects of ERM

Answer 1

Is a process, not a one time analysis Enterprise-wide basis Not all risks are critical or material; focus on those that are Risk has upside as well as downside - it is when actual outcomes differ from expected Risks must be quantified; dependencies must be evaluated and quantified Strategies must be developed to avoid, mitigate, or exploit risk factors Strategies are evaluated as a tradeoff of risk & return - to maximize firm value

Question 2

Categories of Risk

Answer 2

• Financial
• Operational
• Strategic
• Insurance Hazard

Question 3

General Environment Risks

Answer 3

• Political
• Uncertainties
• Government Policy
• Macroeconomic
• Social
• Natural

Question 4

Industry Risks

Answer 4

• Input Market
• Product Market
• Competitive Uncertainties

Question 5

Firm Specific Risks

Answer 5

• Operating
• Liability
• R&D
• Credit
• Behavioral

Question 6

Implemenation Strategies

Answer 6

• Avoidance
• Reduction in chance of occurrence
• Mitigation of the effect of a given occurrence
• Elimination or transfer of the consequences
• Retention, by design or default of some or all of the risk

Question 7

Important elements that differentiate model quality

Answer 7

• Reflects relative importance of various risks
• Modelers have a deep knowledge of the fundamentals of those risks
• Includes dependencies
• Modelers have a trusted relationship with senior management

Question 8

ERM

Answer 8

Enterprise Risk Management is the process of systematically and comprehensively identifying critical risks, quantifying their impacts and implementing integrated strategies to maximize enterprise value

Question 9

ERM Process

Answer 9

• Diagnose
• Analyze
• Implement
• Monitor

Question 10

Good vs. Weak Model

Answer 10

• Show as realistically as possible - risk & reward from a range of different strategies
• A weaker model may overstate some risks & understate others
• A good model recognizes its own imperfection
• Extent & Quality of Data

Question 11

Essential elements of the Enterprise Risk Model

Answer 11

• Underwriting Risk
• Reserving Risk
• Asset Risk
• Dependencies (Correlation)

Question 12

Underwriting Risk Parameters

Answer 12

• Loss Frequency & Severity Distributions
• Pricing RIsk
• Parameter Risk
• CAT Model Uncertainty

Question 13

Parameter Risk Components

Answer 13

• Estimation Risk
• Projection Risk
• Event Risk
• Systematic Risk

Question 14

Approaches to setting captial requirements

Answer 14

• Set captial based on default avoidance
• Results in a downgrade
• Sufficient captial to service renewals
• Not only survive a major catastrophe, but to thrive in its aftermath