Objective 1 Flashcards

Question

Describe a **risk map** | (ERM107)

Answer 1

* Qualitative evaluation of the interaction between risk factors, which pinpoints the risks that have the greates potential impact * Follow 3 steps: 1. Assign how row *y* impacts column *x* from 0 to 2 2. Sum values across columns (left-right) to get the total value 3. Sum values across rows (top-down) to get the passive score

Answer 2

1. Identify key environemntal risk factors 2. Elaborate major themes that may characterize future competitive developments 3. Create environmental scenarios based on the major themes (e.g., a 2x2 matrix of combinations of 2 major themes) 4. Evaluate key strategic risk factors in various scenarios (e.g., common risk factor across the 2x2 matrix) 5. Formulate strategic alternatives/options and evaluate them in different scenarios

Answer 3

* Helps managers evaluate **robustness of strategic alternatives** * Develop **response capabilities** for future unexpected events * **Improve future performance** through structure thinking around possible scenarios

Answer 4

1. Traditional planning tools (can be complemented with scenario planning / real options) 2. Scenario analysis 3. Continency planning (useful for pre-defined/predictable risks) 4. Real options (can be created via planned trails or autonomous experiments) 5. Mindfulness 6. Learning and selection (can include trails to test alternative solutions)

Answer 5

1. To identify, evaluate, and quantify (if possible) risks and their correlations/dependencies from *all sources* across an organization 2. To ensure the organization actively implements **risk treatment strategies** that leverage knowledge of its risks to achieve appropriate **risk and return tradeoffs** in accordance with an organization's **values and goals**

Answer 6

1. A core risk culture, risk organization, and risk governance 2. An iterative process (a.k.a., an **ERM control cycle**) of: * identifying and evaluating risks, * setting risk treatment strategies, * monitoring results 3. Recognition of external impacts and influences from: * the economy, * the marketplace, * the views of regulators, the investment community, and rating agencies

Answer 7

1. Risk identification and categorization 2. Risk evaluation 3. Risk treatment 4. Strategic treatment of risk 5. Risk monitoring 6. External impacts and influences

Answer 8

1. Comprehensive (covers all material and emerging risks) 2. Inclusive (all risk-taking functions of the org are involved) 3. Efficient (balance bottom-up and top-down processes) 4. Consistent (common framework) 5. Focused (qualitative, quantitative assessment and prioritization)

Answer 9

1. Attending industry conferences 2. Researching industry and academic journals 3. Serving on industry committees 4. Conducting discussions with industry experts 5. Conducting comparative analysis of risks disclosed by competitors 6. Understanding general socio-economic and technological trends 7. Reading ERM surveys and analyses 8. Introspective review of the exposures, claims, policyholder populations, terms and conditions of the policies written, etc.

Answer 10

It is an effective method to identify enterprise-wide risks if performed periodically. Includes: 1. Workshop participants 2. Advance communication 3. Risk registries, assessment surveys, or interviews 4. Workshop itself

Answer 11

1. Stress tests 2. Reverse stress tests 3. Stochastic models 4. Reference to standard measures 5. Hybrid methods

Answer 12

* Limited to compound interactions that are remote but possible * Data limitations may be difficult to implement and understand

Answer 13

Risk-Adjusted Return on Capital RAROC = (Net Income - Risk Adjusted to Net Income) / Available EC

Answer 14

Return on Risk-Adjusted Capital RORAC = Net Income / Required EC

Answer 15

Risk-Adjusted Return on Risk-Adjusted Capital RARORAC = (Net Income - Risk Adjustment to Net Income) / Required EC

Answer 16

Return on equity ROE = Net income after tax / Shareholder Equity

Answer 17

Return on Assets ROA = Net Income / Assets

Answer 18

1. Assessing capital adequacy relative to **regulatory requirements** 2. Determining appropriate **risk treatment strategies** 3. Analyzing financial **performance** (i.e., setting targets and qualitative feedback) 4. Align **pricing** with risk-adjusted metrics 5. Developing business strategies by determining aggregate risk relative to **risk appetite** 6. As a **risk metric** to determine relative risk and reward

Answer 19

1. Insurance or reinsurance 2. Hedging 3. Capital market products and alternative risk transfer (ART) 4. Implementation of policyholder awareness, education programs or loss control measures 5. Changes in governance or process controls 6. Changes in business mix, distribution, or target markets 7. Exiting specific markets and products, or reducing coverage

Answer 20

1. Accounting ratios, e.g., liquidity ratios 2. Statistics, e.g., combined ratios 3. Asset and liability durations 4. Risk measures, e.g., EC or coefficients of variation

Answer 21

* Key Risk Indicators * If mapped to **specific risks**, they enable: * active monitoring of **potential** losses or **increasing** exposures, facilitating risk mitigation **decisions**, * easy **measurement**, * integration with **regular** risk assessments, **dynamically updated**, * provide significant risk-related insights to management of a **BU**.

Answer 22

It categorizes and describes all the major risks that may be faced by a firm

Answer 23

* Financial market risk 1. Stock market risk 2. Interest rate risk 3. Exchange rate risk 4. Credit risk 5. Spread risk 6. Systemic risk 7. Liquidity risk * Political and regulatory risk * Macro-economic risk 1. Business cycles 2. Inflation risk * Environmental risk

Answer 24

* Operational risk 1. People risk 2. IT risk 3. Project risk 4. Legal risk 5. Pricing risk 6. Process risk * Strategic risk * Reputational risk

Answer 25

* Liabilities may move less/more than the value of the supporting assets, potentially creating losses * Annuities' and pensions' payment streams are highly interest-sensitive

Answer 26

High interest rates: * Demand for fixed interest instruments, creating downward pressure on prices of stocks and other assets * Reduce savings of individuals who need to borrow cash for loans and mortgages * House prices and markets can become depressed Low interest rates: * Discourage savings and other investments

Answer 27

1. **Transaction risk -** exposure to _contractual obligations_ specified in different currencies 2. **Economic risk -** exposure to exchange rate _fluctuations_ 3. **Translation risk -** exposure to requirements of _financial reporting_ with assets and liabilities in different currencies

Answer 28

1. **Bond default risk -** bond issuer is unable to pay some or all payment of outstanding loan 2. **Credit downgrade risk -** possible change in value of bond investments due from change in credit rating 3. **Sovereign risk -** full or partial default by a country 4. **Credit default risk -** debtor is unable to repay some or all the amount owed 5. **Counterparty risk -** counterparty fails to meet its obligations through default of other reasons, associated with **concentration risk**

Answer 29

Reduction in real returns because of _falling purchasing power of cash_, much more of an immediate issue in the developing world (therefore connected with the **exchange rate risk**)

Answer 30

1. Environemntal changes could impact the operations of the enterprise (e.g., severe weather causes disruption) 2. Environmental risk is the risk arrising from environmental liability

Answer 31

1. Accidental loss or corruption of data 2. Viruses 3. Unidentified bugs in programs 4. Theft of data or intellectual property throgh system security breaches 5. System failure from inadequate capacity 6. Outages and interruptions to service 7. Failure of suppliers

Answer 32

1. **Scope risk -** project goals are changed during implementation * May arise from (A) scope creep or (B) gap risk 2. **Defect risk -** risk that hardware or software acquired does not meet project needs 3. **Schedule risk -** risk of loss due to schedule failure 4. **Resource risk -** risk of loss due to resources not being available

Answer 33

1. Risk of lawsuit 2. Defective contracts (i.e., contracts are not legally enforceable)

Answer 34

1. Exchange rate risk 2. Model risk and parameter risk * Assumptions could be wrong * Model inadequately captures risks * Parameters used are inadequate 3. Adverse experience 4. Adverse selection

Answer 35

1. Health and safety 2. Manufaturing and engineering 3. Model risk

Answer 36

* Project or Engineering Risk - defective components * People Process Risk - insufficient training * Engineering Process Risk - flawed maintenance of electrical equipment * Engineering Process Risk - human error * Health and Safety - flawed process due to lack of safety management system * Strategic Risk - lack of culture that emphasizes safety * People Risk and Model Risk - human error rejected findings of modeling software

Answer 37

1. Plunged share value 2. Boycotts impacted BP's retail gas stations through the US 3. Billions of dollars of fines and compensation 4. Investment in major advertising campaign to recover their reputation

Answer 38

1. Systemic risk - financial crisis lead to dried up deposits 2. Liquidity risk - depositors wanted to take cash, but the assets were in mortgages 3. Interest rate risk / Spread risk - mismatch between the assets and liabilities 4. Strategic risk - lack strategic risk management lead to misassessment of strategy of growth through leverage

Answer 39

1. **Approve** the overall risk management strategy and/or policy 2. Oversee the process of ensuring the insurer's **responsible persons** are fit and proper 3. Setting the **risk appetite** of the insurer 4. **Monitor key risks** by insuring the implementation of a suitable risk management framework

Answer 40

A dedicated committee to focus on matters related to risk management, established by the Board. Its objective is to assist the Board of Directors by: * exercising due care, diligence and skill in relation to the effective risk management of major risks to which the insurer is exposed to * verifying that the insurer's risk management and internal control systems are adequate and functioning effectively

Answer 41

1. RC have a diverse background and appropriate qualifications 2. Ensure RC "asks questions" of the reports submitted, and of management 3. Ensure RC have support of the Board and the appropriate level of management 4. Consider the appropriateness of the level and volume of reporting to the RC 5. RC should be responsible for keeping track of leading practices, trends and aiming to improve the organization's risk management process

Answer 42

* Specific * Measurable * Achievable * Realistic * Time-bound

Answer 43

1. Bring risk-related functions and specialist under a common framework and structure 2. Take actions on the risk-management related issues * Set risk tolerance * Align incentives to risk appetite * ... 3. Establish the insurer's performance drivers and key internal/external stakeholders 4. Establish a friendly relationship between the CRO and CFO because they share the objectives of improving earnings predictability and limiting exposure to adverse variations in earnings 5. Facilitate the dialogue and debate at management and board level about the insurer's risk tolerance 6. Have visibility and authority 7. Be the coordinator of risk activities and measurement at the company level

Answer 44

1. Transparency of decision making process 2. The size and nature of the insurer 3. The mix of risks faced by the insurer

Answer 45

1. Consistently applied "business unit engagement processes" 2. Common risk language 3. Standard risk management processes 4. Agreed risk behaviors / culture 5. Appropraite reward / compensation systems 6. Clear reporting and monitoring

Answer 46

1. Inhibits business management buy-in and the task of embedding ERM 2. Reinforces a silo approach 3. Focuses on form over substance, which may result in real risks not being identified 4. Proliferates process inefficiencies and duplication 5. Difficults aggregating risks across categories due to inconsistent measurement of risks 6. Creates extra cost for the business and impacts performance outcomes

Answer 47

1. Universally understood **top-down risk rating** system 2. Rating system that relates risk rating to the **level of management action** to mitigate the risk 3. Standard **templates** for use across the insurer and common risk categories 4. Reporting and escalation **thresholds**

Answer 48

1. Allows for the correct identification and classification of *real risks* 2. Enables the organization to take an enterprise-wide view of risk management 3. Promotes awareness that all risks have been defined, classified and assessed consistently 4. Meets increasing global supervisory requirements 5. Avoids unnecessary costs due to process inefficiencies and duplication

Answer 49

Whether it: * supports the appropriate goals, activities and outcomes, and * mitigates the risks of not achieving desired outcomes

Answer 50

1. Risks could be prevented or detected earlier, when they're smaller and less costly to remediate 2. Encourages speaking up about things that "are not right", which will enable speedier detection of issues 3. Supports innovation by hearing about ideas for improvement

Answer 51

1. Include proactive principles in the *Risk Management Strategy* and *Group Policies and Practices* 2. Set the corporate risk goal for senior managers based in improving the **risk culture index** 3. **Include proactive behaviors** in role definition, performance management, and development processes 4. Develop **training** programs for managers and staff in face to face and online/blended formats and include the proactive principles in other training 5. Place information on the company **intranet** including incident reporting portals 6. Create measurable **progress**

Answer 52

1. Consider and develop a **risk management behavioral model** that suits the insurer's broader culture and operating environment 2. Secure support of **senior management** and development of their risk awareness 3. Ensure that the right **behaviors are embedded in the design** of frameworks and processes 4. Design an implementation plan over a **realistic time frame, appropriately resourced** 5. Reinforce behaviors through multiple **influencing channels** 6. **Benchmark** behaviors before starting the implementation program and assess the progress 7. Link the measures to **business outcomes** to prove the value add of the desired risk management culture

Answer 53

1. Ensure the risk function is involved in strategic planning 2. Include both risks and opportunities in reports prepated by risk functions and internal audit functions 3. Develop reward systems that encourage calculated risk taking 4. Report on emerging, industry-wide, cross-border, and longer term risks

Answer 54

1. Get the balance right of the size of the incentive vs motivation 2. Decide which individuals or groups to include 3. Establish clarity about what to measure 4. Make linkages between risk management performance and talent management/capability development processes 5. Ensure that incentive programs are targeted at the appropriate level of staff 6. Ensure that they do not have unitended consequences

Answer 55

1. Current and emerging key risks in the business and within the wider environment, and changes over time 2. Changes in risk indicators 3. Capability for identifying and managing risks

Answer 56

1. Top 10 residual risks 2. Key risk indicators 3. Scoring chart for risk severity and control effectiveness 4. Heatmap of all substantial inherent and residual risks 5. An additional commentary section 6. Significant project progress

Answer 57

Potential conflicts include: * May deliver short term assurance benefits, but not longer-term * Can potentially undermine the necessary independence of the internal audit function * Can send the wrong message to the organization that ERM is assurance/compliance Best practice is to clearly **delineate the roles** of internal audit and the function tasked with developing and maintaining an insurer's ERM framework

Answer 58

* Outlines the way in which the insurer manages each relevant and material category of risk, both strategically and operationally * Describes the linkage between: * Insurer's tolerance limits * Supervisory capital requirements * Economic capital * Process and methods for monitoring risk

Answer 59

1. A clear risk management policy 2. The relationship between risk management and the insurer's purpose or mission, values, and strategic objectives 3. How risk management is embedded in the related processes of capital management, pricing, reserving, and performance management 4. Scope of activities to which the policy applies 5. Appropriate supervisory requirements and considerations 6. Requirements with respect to acquisition of new business 7. Categories of risk and risk definitions, and how these map to internationally accepted categories/definitions 8. Define risk terminology used 9. Risk apettite should be set forth for furhter discussion on risk tolerance 10. Governance and oversight aspects 11. Behavioral expectations of all staff 12. Minimum process-level requirements that apply universally across the operations of the insurer 13. Requirement for the conduct of the insurer's own risk and solvency assessment 14. Specific requirements attaching to defined risk categories 15. The process for reviewing and updating the policy

Answer 60

* Sets overall quantitative and qualitative tolerance level, based on the insurer's strategy * It defined **tolerance limits** (applicable to BU plans) for each relevant and material category of risk

Answer 61

* Risk tolerance - * A higher-level statement that considers broadly the levels of exposure to risks that the Board deems acceptable * Risk limits - * Narrower, at the risk category level * They set the acceptable level of variation around objectives associated with an insurer's annual business plan and budget * They translate the risk tolerance into language that can be used on a day-to-day basis

Answer 62

1. Lines of business 2. Earning volatility 3. Requirements to meet supervisory criteria 4. Desired capital strength 5. Maintaining levels of EC 6. Maintaining a buffer level of capital in excess of the minimum supervisory capital 7. Maximum exposure to aggregation of risk 8. Dividend paying capacity 9. The maximum net loss accepted 10. Minimum acceptable pricing principles 11. Descriptions of unacceptable operational risk scenarios 12. Setting go/no-go criteria for corporate transactions and strategic projects

Answer 63

The feedback loop enables the insurer to take the necessary action in a timely manner in response to changes in its risk profile, based on appropriate and good quality information

Answer 64

1. Establish **thresholds** for reporting significant issues 2. Create **protocols for escalation** of issues to various levels of management 3. **Report** risk aggregations to identify where limits (and potentially risk tolerance) may have been exeeded

Answer 65

* Thet are risks that are developing subject to uncertainty and ambiguity, difficult to quantify using traditional risk assessment techniques * Insurers are interested because: * they influence the organization strategy * they impact the performance of UW portfolios * they impact operational risks * they present opportunities

Objective 1 Flashcards

(93 cards)