Chapter 28

Question 1

Define risk appetite

Answer 1

The level of risk an organization or individual is willing to pursue or accept to achieve objectives. It reflects a general philosophy toward risk-taking.

Question 2

Define risk profile

Answer 2

A snapshot of the current or projected level of risk exposure, based on the types and magnitude of risks faced. It shows the actual or potential risk environment (risks we’re exposed to + risks we’re likely to be exposed to)

Question 3

What makes a risk insurable?

Answer 3

1. Insurable interest
2. Financially and reasonably quantifiable in nature
3. There must be a relationship between the financial loss incurred and the claim amount

Desired criteria:
a. P(Occurrence) must be relatively low
b. Eliminate moral hazard
c. Independent risks
d. Ultimate limit of L taken on
e. Large #s of potentially similar risks pooled to reduce variance and uncertainty
f. Sufficient existing data to estimate P(Occurence) and loss

Question 4

Define risk limits

Answer 4

Specific thresholds or boundaries set to control risk-taking within acceptable levels. They operationalize risk appetite into measurable constraints.

Question 5

Define risk metrics

Answer 5

Quantitative or qualitative measures used to assess, monitor, and communicate risk levels. They provide insight into the nature, magnitude, and likelihood of risks

Question 6

Define risk capacity

Answer 6

The financial and operational ability to absorb risk without jeopardizing stability or objectives. It is the maximum risk an entity can realistically bear

Question 7

Define risk tolerance

Answer 7

The acceptable variation in outcomes or risk exposure aligned with the risk appetite. It specifies how much deviation from objectives can be endured.