Chapter 32 Flashcards
(7 cards)
Define liquidity risk
Risk that individual or company, although solvent, doesn’t have available sufficient financial resources to enable it to meet its obligations as they fall due
* Insurance companies normally have little exposure to liquidity risk (cash deposits or stock market assets)
* GIs face liquidity risk if claim costs>expected
* Benefit schemes face liquidity risk in event of bulk transfer out of scheme
* Banks face liquidity risk so they hold high-quality liquid assets
* CISs face liquidity risk if clients request access to their funds when underlying can’t be sold or ,more than expected customers want to sell their units
Describe operational risk
Risk of loss resulting from inadequate or failed internal processes, people and systems or from external events
* Inadequate or failed internal processes (mismanagement, data errors, fraud)
* Conduct risk, like mis-selling, interest rate manipulation and money laundering
* Reliance on third party to carry out various functions for which org is responsible like admin or investment work outsourced
* Failure of plans to recover from an external event
Describe external risk
- From external events like storms, floods, in regulations, tax and legislation
- Failure to arrange mitigation against such risk is operational risk
Describe climate change risk
Risks arising from adverse changes in physical environment and secondary impact on economy at regional or global level.
Categorised into:
* Physical climate risks= pollution, global warming, rising sea levels
* Transition risks= economic, political and market as a result of efforts to mitigate climate change like customer preferences towards green products
* Liability risks= injured parties seeking compensation for impacts of climate change (GI)
Describe market liquidity risk
Market liquidity risk arises where a market doesn’t have the capacity to handle the volume of the asset to be bought or sold @time when deal is required without adverse impact on price
* Arises for smaller markets
* Amount has to be predictable
Define market risk
Related to change in investment mark values or features corrected with investment markets like inflation and interest rates
Leads to changes in asset values, liability values and ALM
Describe the technique of managing risks for a project
Make high-level preliminary risk analysis (should we do it or not?)
Hold brainstorming session with project experts, senior internal and external people (used to long-term thinking)
Aims:
Identify likely+unlikely, upside+downside risks
Discuss their interdependency
Broad evaultion of each
Consider freq of occurence + probable consequeces
Generate initial mitigation process
Briefly discuss these options
Identify further risks and mitigation options (research deskop analysis)
Obtain expert opinions (familiar with details of project) and plan financing
Set out all identified risks in risk register or matrix with cross-references to other risks- interdependence
