Chapter 18- Risk Management and Control Flashcards Preview

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Flashcards in Chapter 18- Risk Management and Control Deck (37)
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Outline the requirements of Insurance Act to demonstrate sound risk management? (5)

o Good corporate governance

o Sound risk management procedures

o Adequate control functions

o Independent audit and monitoring functions

o Adequate disclosure and reporting to stakeholders


Outline the provision in the Insurance Act regarding adopting, implementing and documenting of a governance framework? (5)

• Protects the interest of the policyholders

• Proportionate to the nature, scale and complexity of the insurance business and risks

• Include an effective system of corporate governance, internal control and risk management

• The insurer also requires monitoring system to ensure compliance

• The prudential authority may require independent review at the insurers costs if not satisfied


outline the functions of a risk committee established? (8)

• Assist the board of directors in developing risk management strategy

• Assist the board of directors in evaluating the adequacy and effectiveness of a risk management system

• Identify the build-up of a concentration of risk

• Assist in identifying and monitoring any material risk

• Facilitate communication between the board of directors and senior management

• Ensure segregation between risk management and operation duties

• Introduce measure to enhance risk management

• Oversee the monitoring of risk management at an individual business unit and enterprise level


the requirements for a risk managment system is as follows? (5)

• Effective risk management is critical to honouring its promise to policyholders

• Insurer must have a board approved, enterprise wide risk management system consisting of a strategies, polices, procedures and tools for assessing, monitoring, reporting and mitigating material risks

• The risk appetite of the system must be aligned with business objectives and strategies

• An insurer must establish, maintain and operate within a system of effective internal control

• To provide appropriate governance the following control functions would be required:
o Risk management
o Compliance
o Internal audit
o Actuarial function


outline the roles and responsibilities regarding risk management? (4)

• The board of directors hold the ultimate responsibility to ensure compliance with the prudential standards

• The head of the control functions are responsible to provide an opinion on the effectiveness of risk management and internal controls

• The internal auditors will conduct a review to provide assurance to the board of directors of effective risk management

• The insurer’s external auditors will provide assurance to the PA as well as the board regarding the compliance with prudential standards


outline the duties of a risk managment function? (5)

• Assists the board of directors and senior management to develop and maintain a risk management system

• The risk management function provides reasonable assurance that there are adequate mechanisms to
o Identify individual and aggregated risks
o Assess, monitoring and manage risk identified
o Gain and maintain an aggregate view of the insurers risk profile
o Forward looking assessment of the insurers profile

• Provides written reports to the board, senior management, other control functions regarding risk profile, risk exposures and appropriate mitigation actions

• Document and report material changes to the risk management system

• Have access to the board of directors


Outlined what would be documented in a risk management strategy as a minimum? (6)

• Identify objectives of the strategy

• Describe each current material risks and emerging risks

• List the policies and procedures for dealing with risk management

• Summaries the roles and responsibilities of risk management functions, board, senior management and board committees

• Included documented process for board approval for changes or deviations

• Outline process for creating awareness of risk management system


An insurers risk appetite statment clearly include? (4)

• Overall risk that they are willing to accept in strategic objectives and business plan

• For each type of material risk that maximum levels to which they are willing to operate within

• Monitor and report compliance with limits

• Regular review appropriateness of limits


List the board approved polcies in the risk management system? (14)

• Asset-liability management
• Capital management
• Concentration
• Credit
• Fitness and proprietary
• Information technology
• Insurance fraud
• Investment
• Liquid management
• Operational
• Outsourcing
• Reinsurance and risk transfer
• Remuneration
• Underwriting


outline the requirements in the ALM policy? (4)

• Clearly specify the nature, role and extent of ALM as well as integration with product design, pricing and investment management

• Co-ordinate the management of asset and liability risk

• Recognise the interdependence between assets and liabilities (correlation between asset classes and business line)

• Take into account off-balance sheet risk and the contingency that they may revert to the insurer


outline the requirements in the capital management policy? (6)

• Internal capital planning process

• Strategy for ensuring that adequate capital is maintained

• Provide identification and measurement of risk that may result in capital shortfalls

• Establish procedures to monitor compliance with internal and regulatory capital targets

• Set out actions that will occur in the event of a capital shortfall

• Provide for appropriate management and regular review


outline the requirements in the concentration risk policy? (2)

• Identify sources of concentration risk and strategies to ensure risks remains in established limits

• Analyses possible correlation between risk of concentrated exposure


outline the requirements in the credit risk policy? (6)

• Set out approach in assessment, monitoring, managing and reporting on credit risk

• Proportional to complexity, scale of insurers operations

• Identify the full range of credit exposures including direct (credit facilities and debt instruments)and indirect (financial instruments)

• Identify range of exposure that they would want to retain

• Provide a quantification for credit risk

• Identification of risk mitigation such that credit exposure is kept within the desired limits


outline the requirements in the insurance fraud policy? (4)

• Outline appropriate strategies and procedures to deter, prevent, detect, report and remedy insurance fraud

• Outline appropriate strategies for managing fraud risk

• Consider the effectiveness of fraud risk management may be enhanced by contributing to industry wide initiatives

• Provide a prompt for reporting to regulatory bodies


outline the requirements in the investment policy? (9)

• Ensuring compliance with asset requirements prescribed under the financial soundness standards

• Set out strategy for investing including asset allocation and how they are related to ALM

• Explicit risk management to more complex and less transparent classes

• Take into account factors the will influence long-term sustainability example environment, government and social

• Investments would need to be made such that it ensures security, quality, liquidity and profitability of insurance portfolio

• Investments that do not trade on regulated financial markets are kept within prudent levels

• Ensures appropriate diversification

• Ensures that conflicts of interest are avoided or managed such that benefits are made in the best interests of the policyholders

• Ensure appropriate matching with respect to unit-linked, index-linked and guaranteed liabilities


outline the requirements in the liquidity managment policy? (5)

• Sets out identification, assessment, monitoring, management and reporting of liquidity risk such that obligations can be met as they fall due

• The approach should be proportional and should include triggers to detect breaches and action plans to respond to liquidity stresses

• Include modelling of the insurers liquidity from a range of scenarios e.g. catastrophes, downgrades and defaults

• Take into account the liquidity consequences of financial difficulties or reinsurance default

• Impact of adverse scenarios of the liquidity given investments


outline the requirements in the operating risk policy? (2)

• Sets out identification, assessment, monitoring, management and reporting of operational risk

• To the extent that quantitative data is available it should be used quantify operational risks


outline the requirements in the underwriting policy? (7)

• Identify that nature of insurance risk including the class of insurance as well as the risk to be underwritten

• Describe the formal risk assessment process for underwriting
o Criteria used for assessment
o Methods for monitoring the emerging experience
o Methods by which the emerging experience is taken into consideration in the underwriting process

• Establish decision making process and controls where non-mandated intermediaries and underwriting managers perform binder functions

• Set out actions of insurer to assess and manage the risk of loss from inadequate pricing

• Establish the insurers process with respect to assumption setting with reference to risk appetite

• Set out the relevant data to be considered in the underwriting process

• Review the adequacy of the claims management process


outline the requirements in the reinsurance policy? (7)

• Outline the strategies and procedures for selecting appropriate reinsurance programmes

• Ensure that transparent reinsurance and risk transfer arrangements allow PA to understand economic implications

• Provide process and procedures to ensure compliance with selection strategy

• Identify the level of risk transfer that is appropriate given the insurers risk appetite

• Establish principles of assessing the appropriateness, creditworthiness and diversification from instruments

• Establish procedures for assessing the effectiveness of risk transfer

• Provide for liquidity management due to mismatch between claims payments and recoverables


In monitoring the credit risk to which the insurer is exposed the internal controls will take into account the following? (6)

• Counterpart exposure is the amount the a firm would lose if a counterparty were to fail to meets its obligations

• Assets exposure is the amount a firm will lose if an assets or assets class where to yield less than expected

• Adequacy of diversification in spreading credit risk

• Likelihood of defaults

• Expected loss in the event of defaults

• Exposure period


Market risk controls will include the following? (3)

o Defining governance arrangements and authorisation levels around investment management decisions

o Understanding the sensitivity of liability calculations to movements in the market

o Outline likely management actions in the event of certain movements in key market indicator levels


Define liquidity risk? (1)

• Liquidity risk is the risk arising from short-term cashflows where a mismatch occurs and assets will have to be realised at a loss to meet the outgo


Provide examples of opperational risk? (5)

o Internal and external fraud

o Failure to comply with employment law

o Damage to physical assets

o Business disruption and system failures

o Transactional processing failures


outine insurance risk management? (2)

• Insurance risk refers to the fluctuations in timing, frequency and severity of insured event relative to the that expected at the time of underwriting

• Information that may be monitored include
o A statement of profit and loss for each class of business it writes
o Amount and detail of new business written and the amount of business that has been cancelled
o Emerging trends in persistency and expenses levels


outline group risk? (2)

• Group risk arise where one firm in a company can impact on the reputation and financial soundness of different firms within the group

• Group risk can also arise from internal loans and internal reinsurance agreements


Define Reinsurance? (5)

• Reinsurance is an agreement where one party (the reinsurer)
• In consideration for a premium
• Partially or fully indemnifies another party (the cedant)
• From the liabilities associated with one or more polices
• In one or more reinsurance contracts


Outline the reasons for reinsurance? (4)

• Reduce claim fluctuations

• Reduce new business strain

• Technical expertise

• Improve solvency position through increased capital


Outline the Types of reinsurance? (4)

• Original terms

• Risk premium

• Catastrophe loss

• Financial reinsurance


Outline the factors that will infleucen the choice of reinsurance? (7)

• The purpose and requirement for reinsurance
• The cost of reinsurance
• Risk appetite of the insurer as well as technical expertise
• Variety of reinsurance offered
• Type of business
• Maturity of business
• Legal and tax implications


Outline the elegibility criteria that needs to be met such that the reinsurance can be taken into account in financial soundness calculations? (5)

• The assessment of the risk transfer must be carried out in context of commercial environment, judge with reference to a range of outcomes (reasonably to occur in practice)

• A reassessment must be done if there is a material change to the risk transfer instrument

• Reasonable probability of significant loss without the instrument

• Where risk mitigation (transfer of significant risk) is not self-evident this should then be verified

• Furthermore documentation regarding the economic intent and risk analysis (cash flow projection for various scenarios) must be held by both parties

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