Marshall

Question 1

Example of external systemic risk

Answer 1

material/labor cost trends

Question 2

Components of independent risk (2)

Answer 2

1. random component of parameter risk

2. random component of process risk

Question 3

Quantitative techniques are best for measuring these risk sources (2)

Answer 3

1. independent risk

2. past sources of external systemic risk

Question 4

Reasons quantitative modeling techniques do not capture all sources of uncertainty (3)

Answer 4

1. good models fit past data well (often fit away past external systemic risk, leaving only random sources)
2. outcome may be substantially affected by past episodes of systemic risk (representative of future?)
3. highly unlikely to capture any internal systemic risk

Question 5

Sources of internal systemic risk (3)

Answer 5

1. specification error (inability to perfectly model insurance process)
2. parameter selection error (cannot adequately measure all predictors)
3. data error

Question 6

Risk indicators for balanced scorecard assessment of specification error (5)

Answer 6

1. # of models used
2. range of results
3. reasonability checks conducted
4. subjective adjustments required
5. extent of monitoring and review

Question 7

Risk indicators for balanced scorecard assessment of parameter selection error (6)

Answer 7

1. ability to identify and use predictors
2. extend predictors lead vs. lag claim costs
3. subjective adjustments required
4. ability to detect trends
5. stability
6. uncertainty in superimposed inflation

Question 8

Risk indicators for balanced scorecard assessment of data error (4)

Answer 8

1. extent, timeliness, and reliability of info from business
2. access to data
3. quality of reconciliations
4. extent of revisions to past data

Question 9

External systemic risk categories (7)

Answer 9

1. economic and social
2. legislative, political, and claims inflation
3. claim mgmt process change
4. expense
5. event
6. latent claim
7. recovery

Question 10

Examples of economic and social external systemic risk (4)

Answer 10

1. inflation (AWE/CPI)
2. economic conditions (unemployment)
3. fuel prices
4. driving patterns

Question 11

Examples of long-tailed legislative, political, and claims inflation external systemic risks (4)

Answer 11

1. precedent setting in courts
2. changes in medical costs
3. changes in legal costs
4. shifts in large claim frequency or severity

Question 12

Example of short-tailed legislative, political, and claims inflation external systemic risk

Answer 12

claims inflation increasing at a different rate from ACE

Question 13

Examples of claim management process change external systemic risk (3)

Answer 13

1. reporting/payment patterns
2. re-opening rates
3. case reserve handling changes

Question 14

Expense risk (external systemic risk)

Answer 14

uncertainty associated with cost of managing run-off of liabilities or maintenance of unexpired risk

Question 15

Correlation w/in and b/w valuation classes

Answer 15

independent risk - uncorrelated w/any other source
internal systemic risk - uncorrelated w/each other source, but has correlation b/w valuation classes or OCL/PL
external systemic risk - uncorrelated w/each other source, but may have correlation b/w similar external systemic risk categories

Question 16

Overall COV

Answer 16

= sqrt( ind COV^2 + int COV^2 + ext COV^2)

Question 17

Risk margin for normal distribution

Answer 17

risk margin = Z * overall COV

Z= z-value for percentile of a normal distribution under a given probability of adequacy

Question 18

Risk margin for lognormal distribution

Answer 18

risk margin = (e^(mu + z*sigma) / sum of weights) - 1

Question 19

Types of reasonability checks (6)

Answer 19

1. sensitivity analysis
2. scenario testing
3. internal benchmarking
4. external benchmarking
5. hindsight analysis
6. mechanical hindsight analysis

Question 20

Main dimensions for benchmarking (2)

Answer 20

1. portfolio size

2. tail length

Question 21

Independent risk benchmarking for OCLs (tail length and portfolio size)

Answer 21

long-tail COV > short-tail COV

small portfolio COV > large portfolio COV

Question 22

Independent risk benchmarking for PLs vs. OCLs (tail length)

Answer 22

long-tail: PL COV > OCL COV

short-tail: OCL COV > PL COV

Question 23

Benchmarking for internal and external systemic risk (tail length)

Answer 23

long-tail COV > short-tail COV