Mnemonics

Question 31

25.What are the benefits of risk management to a provider?

Answer 31

SAVIOURS * Strategic decision making improved (integration of risk into processes) * Avoid surprises * Volatility of profits reduced (improved financial stability/quality of business) * Improved profits via capital efficiency (management and allocation of capital) * Opportunities exploited for profit * Understand interdependencies (concentration of risk, diversification benefits, natural synergies) and aggregate risk exposure * React quickly to emerging risks * Stakeholders in the business given confidence

Question 32

26.What categories and example of risks could be used in a risk matrix for a typical project?

Answer 32

Please Never Eat Fried Chicken Past Bedtime * Political - opposition to project, war, terrorism * Natural - earthquakes, hurricanes * Economic - interest rate or exchange rate movements * Financial - sponsor default, incorrect cashflow estimates * Crime - fraud, theft * Project - time delays, budget overruns, bad design, poor planning * Business - competition/lack of demand, operational problems, obsolescence

Question 33

26.Explain the term climate risk and how climate related risk can be categorised into physical, transition and liability risks.

Answer 33

**TPL** Climate risks refers to risks arising from adverse changes in the physical environment and secondary impacts on the economy at a regional or global level **Physical** - first-order effects of environmental changes, eg greenhouse gas emissions, pollution and land use. Effects may be chronic or acute. **Transition** – economic, political and market changes as a result of efforts to mitigate climate change. **Liability** – from injured parties seeking compensation for the impacts of climate change. Impacts may be first-order physical impacts or second-order transition impacts.

Question 34

27.What are the causes of inappropriate advice given in relation to the provision of benefits?

Answer 34

CRIMES * Complicated products * Rubbish adviser * Integrity of adviser lacking * Model or parameters unsuitable * Errors in data relating to beneficiaries * State-encouraged but inappropriate actions e.g. Encouraging people to save for retirement when this might reduce the level of state benefits they are entitled to and reduce their overall standard of living in retirement

Question 35

28.What features of the company might influence its risk appetite?

Answer 35

ESPECIAL * Existing exposure to a particular risk * Size of company * Period of time for which it has operated * Previous experience of board members * Existence of a parent company or other guarantors * Culture of company * Institutional structure * Attitude towards risk of owners and other capital providers * Level of available capital * Level of regulatory control to which it is exposed

Question 36

28.What required factors make a risk insurable?

Answer 36

PAR * Policyholder must have an interest in the risk (insurance vs wager) * claim **A**mount must bear some relationship to the financial loss incurred * Risk must be financial and reasonably quantifiable

Question 37

27.What additional criteria should a risk meet to be insurable?

Answer 37

MUD PIS * Moral hazard eliminated as far as possible * Ultimate limit on the liability undertaken * Data exists with which to price the risk * Pooling a large number of similar risks * Independent risk events * Small probability of occurrence

Question 38

29.What the different ways of **EVALUATING** risk?

Answer 38

SRC * Scenario analysis * Stress testing * Stochastic modelling * Reverse stress testing * Combined stress and scenario testing

Question 39

29.Why is regular risk reporting important within a business?

Answer 39

FRAUD CRIME * Financing * Rating agencies * Attractive investors * Understand better * Determine appropriate control systems * Changes over time * Regulator * Interactions * Monitor effectiveness of controls * Emerging risk identification

Question 40

30.What are the responses a stakeholder can choose from when faced with a risk?

Answer 40

PI RATE * Partially transfer=> to another party * Ignore=> trivial or largely diversified * Reduce=> frequency or severity * Accept=> retain all * Transfer=> to another party * Evade=> avoid the risk altogether

Question 41

30.How can each risk mitigation option be evaluated?

Answer 41

FIRM * Feasibility + cost * Impact on Frequency+ severity and expected value * Resulting secondary risks * Mitigation required in response to secondary risks

Question 42

30.What are the possible reasons for using ART?

Answer 42

DESCRATES * Diversification * Exploit risk as an opportunity * Solvency improvement * Cheaper cover than Re * Available when Re may not be * Results smoothed or stabilized * Tax advantages * Effective risk management tool * Security of payments improved

Question 43

31.Why do insurers underwrite business?

Answer 43

SAFARI * Suitable special policy terms=> identification of the most suitable approach and level of special terms for substandard risks * Avoid anti-selection * Financial underwriting=> reduce risk of over insurance on large policies * Actual claims experience being in line with that expected in pricing basis * Risk classification=> all risks are rated fairly * Identify substandard risks- special terms need to be quoted=> accept as many risks as possible on standard premium rates