Chapter 7: Propriety RFW

Question 1

Strengths of the S&P ERM evaluation COCO SET UD

Answer 1

Components of ERM checked
Overall ERM emphasized vs. Silo approach
Classification to ease communication
Operational performance of risk controls checked

Standard criteria applied
Economic capital assessment
Transparency of ERM encouraged

Unique structure of the company is recognized
Diversification of the company’s risks considered

Question 2

Weaknesses of the S&P ERM evaluation SOULS CAPI

Answer 2

Specific to S&P
Understanding of the company’s risk exposure may lack from ratings agency
Overly optimistic 
Limited to insurance companies
Subjectivity in complexity assessment

Costly and time consuming
Agency risk not considered
Procedures conducted not clearly explained
Impact of the addition of ERM assessment of rating outcome unsure

Question 3

Systemic risk main sources MILE

Answer 3

Market positions - share price falls resulting in further falls
Infrastructure of financial systems - dependencies on each other
Liquidity constraints - the credit crunch (lack of availability of credit)
Exposure to a common counterparty

Question 4

S&P measurement of of ERM Quality CCEMES

Answer 4

Culture
Controls
Extreme event management
Models - Capital and risk
Economic capital 
Strategic management

Question 5

Risk Control as part of ERM: MILE FLAC

Answer 5

Mitigations of risks
Identification of risks
Limits set on retained risks and process in place to ensure this
Execution of the risk management process

Fraud prevention
Learning from risks
Accuracy of financials ensured
Compliance ensured

Question 6

Strategic Management as part of ERM: DRIP CAR (PADDM)

Answer 6

Dividend strategy
Retained risk decision making (diversification, opportunity, expertise) (EDUCT)
Investment strategy
Pricing strategy

Corporate goals at risk
Allocation of capital - optimal risk-adjusted returns
Reward structure put in place

Question 7

Assessment of risk and capital models in ERM: MARCOS DED VRAIM

Answer 7

o Modifications done to standard formulae
o Aggregation of model results across the company
o Reflection of primary risks faced by the company
o Complexity of the models match the complexity of the company
o Offsetting of correlated risks
o Sensitivity risk measures and other risk measures used
o Deterministic vs. Stochastic models
o External factors affecting risks considered
o Day-to-day management influenced by model results
o Validation
o Run procedures
o Assumptions
o Infrastructure that houses the model
o Mitigations integrated into models

Question 8

Extreme event management components in ERM CITIES

Answer 8

o	Contingency plans
o	Impact of risk measured
o	Transfers of risk considered
o	Investigate post mortems
o	Early warning triggers
o	Stress and scenario testing

Question 9

Risk responses to key risks CUS CAS PROD

Answer 9

o	Concentration limit
o	Underwriting guidelines
o	Stats: Portfolio VAR, Greeks, duration, convexity
o	Counterparty limits
o	AL mismatch limits
o	Supplier limits
o	Processing lag
o	Risk indicators like complaints
o	Outsourcing
o	Dependencies – systems and people

Question 10

Economic capital as part of ERM: MERS

Answer 10

o Meet regulatory requirements – SCR/MCR
o Estimation of risk exposure of the company modelling
o Retain sufficient capital to cover risk
o Strategic asset allocation – maximize risk adjusted return

Question 11

Why a company might choose to retain a risk EDUCTS

Answer 11

Economical approach
Diversifying effect of retaining the risk
Unsuitable or unavailable risk responses
Core part of the business
Trivial risk
Specialist knowledge to deal with this risk