Chapter 25: Assessment of other risks

Question 1

Why it’s difficult to model liquidity risk LU

Answer 1

• Lack of data
• Unique exposure to the risk for every business

Question 2

Components of liquidity risk scenario testing PUNT BETI

Answer 2

• Project cashflows
• Understand asset and liability cashflows
• Nature of the cashflows
• Term
• Bid offer spread
• Ease of liquidation
• Timing of cashflows
• Interactions between risks allowed for

Question 3

Scenarios tested for liquidity risk CORD LIT

Answer 3

• Capital markets impaired
• Operational losses
• Ratings downgrade
• Distribution channel lost
• Large insurance claim made
• Interest rate changes
• Termination of contracts (reinsurance, funding, derivatives)

Question 4

Factors to consider when performing scenario analysis on demographic risks SAD

Answer 4

analysis on demographic risks SAD
o Significance of the risk assessed
o Assumptions should be prudent
o Dependencies between risks

Question 5

Difference between non-life and demographic risk FITTOS

Answer 5

• Frequency of claims may differ
• Intensity of claims may differ
• Trends/Cycle are closely linked to economic cycles
• Term of contracts – focus on correct assessment of risk factors vs. expected changes in trends
• One or more claims can be made
• States of the policy may vary over time

Question 6

Types of losses from climate change PTL

Answer 6

• Physical risk – extreme weather, rising sea levels, business interruption, economic instability, political unrest
• Transition risk – economic, political technological and customer preference changes to move to low carbon economy
• Liability risk – compensation claims made due losses suffered by third parties resulting from climate change

Question 7

Areas of uncertainty when modelling climate change risk ASSES

Answer 7

• Areas impacted
• Supply chain components impacted
• Severity of the impact
• Effect of current mitigations:
o Policy changes
o New technology developed
• Stakeholder responses are uncertain
o Governments
o Regulators
o Companies
o Individuals
o Ratings agencies

Question 8

How the financial system can impact climate change FIRE TRIM BG

Answer 8

• Financing for green businesses by banks
• Institutional investment in green technology
• Rating agencies consider ESG factors in their assessments
• Exclusion clauses on general insurance, decreased premiums based on carbon emissions of insured customers
• Tax policies
• Regulatory requirements can include carbon emission status
• Index tracking of investment funds in terms of carbon emissions
• Mandates of investment companies include carbon neutral companies
• Bonds issued based on carbon emissions by asset management companies
• Government policies – government spending/funding to carbon compliant companies

Question 9

Definition of Level risk CAUSI

Answer 9

o Claims experience is not as expected
o Assumptions about demographic experience incorrect
o Underwriting process is flawed
o Short term deviation from expectation
o Intensity and incidence higher than expected

Question 10

Risk rating process HEMSI

Answer 10

 Homogeneous groups created
 Expression of risk factors defined - GLM modelling
 Mortality as function shared characteristics/factors (response variable and covariates)
 Structure of group of interest analysed
 Infer mortality of underlying group