Chapter 9: Risk Policy

Question 1

The purpose/components of risk tolerance statement

BARET FACE:

Answer 1

• Board decides on the level of risk to take
• Application of risk appetite to classes of risk
• Relationships between risk categories considered
• Expressed in qualitative or quantitative measures
• Time horizon of tolerance linked to corporate strategy
• Flexible to allow for changes in strategy
• All risks considered
• Classification at BU and organisational level
• Embedded in risk management policies and procedures

Question 2

Parameters used to articulate risk tolerance PLEAD COMBS E PECK

Answer 2

• Pricing principles – minimum level
• Lines of business accepted or not
• Earnings volatility
• Aggregation of risk limits
• Dividend paying capacity
• Capital strength – rating of level by credit ratings agency
• Operational risk scenarios not accepted
• Maximum catastrophe loss
• Buffer on capital held in excess of minimum
• Supervisory criteria met
• Economic capital levels – chance of meeting policyholder obligations/probability of ruin
• supervisory capital – economic capital?
• Percentiles on a loss distribution
• Extreme loss values
• Corporate transactions and strategic projects
• Key risk indicator

Question 3

Risk limits applied in businesses CUS CAS DILDO KC ROC

Answer 3

• Concentration limits on certain lines of business, geographies and businesses
• Underwriting and pricing limits
• Statistical measure of the investment portfolio: VAR, Convexity, the Greeks
• Counterparty limits
• AL Mismatching degree
• Supplier limits
• Derivative usage limited
• Investment mandates – limiting investments in traded instruments
• Liquidity and reserving benchmarks
• Dependency limits
• Operational guidelines – what can be outsourced, recruitment process, communication channels etc.
• KRIs used
• Credit rating of counterparties to write deals with

Question 4

The components of a risk management policy SPOOR CAPS BAS

Answer 4

•	Strategies and stakeholders
•	Processes and benchmarks to manage risks
o	Identify, measure, treat, and monitoring
•	Objectives and Definitions
•	Organisational structures
•	Reporting processes 
•	Categories and definitions of risk
•	Administrative points 
•	Philosophy and culture of risk management
o	Benefits of ERM 
o	Aims of ERM 
o	Success criteria 
•	Scope and aims of ERM

Question 5

Ways to express risk appetite CLOSET EL

Answer 5

• Credit rating
• Loss ratios
• Operational efficiencies
• Solvency level
• Earnings and ability to pay dividends
• Time horizons
• Economic value
• Liability values considered