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31 Cards in this Set
- Front
- Back
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Definition of Operational Risk What does it include (1) and what does it exclude (2)? |
• The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. • This definition includes legal risk, but excludes strategic or reputational risk |
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5 Risks explicitly included in the definition of Operational Risk |
Inadequate or Failed • Internal Processes • People • Systems • External Events • Legal Risk |
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7 Types of Operational Risk |
• Internal Fraud • External Fraud • Employment Practices and Workplace Safety • Clients, Products and Business Practices • Damage to Physical Assets • Business Disruption and System Failures • Execution, Delivery and Process Management |
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What 3 Possible Explanations does Mango give for a Plan Loss Ratio Modelnot forecasting accurately |
1. Model not able to accurately forecast loss ratios 2. Model is able, but it was improperly used 3. Model did forecast accurately, but management ignored its(unpopular) results |
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In the case of Lemur, was it Operational Risk or Insurance Risk that led to it’sdownfall? |
If all the other companies with that product also failed, then it was insurance risk (eg. Asbestos) Otherwise, it was operational risk: 1. Incorrect model was used (competitor’s had one thatworked) 2. Why wasn’t the model use tested or challenged 3. What governance was in place to hold management accountable for their decision |
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Which areas of a company are affected if a company starts to implementeffective cycle management |
• Planning • Underwriting • Objective Setting • Incentive Bonuses (these last two will generate significant opposition) |
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What characteristics should a system be if it is to be considered from a System Performance Perspective (ie a Utility company) |
The System should be: • Stable • Available • Reliable • Affordable |
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What questions should we ask to determine a company’s Cycle ManagementStrategy |
1. Does the company have a proactive cycle managementstrategy 2. Does the company know where in the cycle the marketstands at any given time? 3. Are underwriters making decisions that are consistent with1. and 2.? |
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What 4 Items should a company focus on during the soft part of a cycle |
• Intellectual Property • Underwriter Incentives • Market Overreaction • Owner Education |
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Why is Intellectual Property so important to an Insurance Company? What are some examples? (4) |
A majority of the insurer’s franchise value is IntellectualProperty • Experts in U/W, Claims, Finance, Actuarial • Proprietary database of policyholder information • Forecasting Systems • Market Relationships • Reputation |
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What should an Insurer do to maintain it’s Intellectual Property? (3) |
To maintain this asset, the company should:1 . Retain Top Talent, Grow and Develop Their Skills 2. Maintain Presence in Core Market Channels 3. Maintain a Consistent Pattern of Investment in systems,models and databases |
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Agency Issues in ORM (4) |
• Owners and Management’s incentives are not aligned • Giving Management incentives based on company value growth could lead them to be too aggressive • On the other hand, if the manager’s wealth is tied up in the company, this could lead the manager to be too risk averse • Production incentives for underwriters are common. This could lead to sloppy underwriting or mispricing |
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Some Operational Risks that are common to all businesses (3 out of 5) |
• Pension Funding (Has HR and financial components) • IT Failure Risk (hardware and software failure, contingencyplanning is critical) • Other HR Risks (loss of important staff, misdesign ofcompensation system) • Reputational Risk • Lawsuits |
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What is Control Self-Assessment? |
A process through which internal control effectiveness isexamined and assessed.The objective is to provide reasonable assurance that allbusiness objectives will be met |
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What are Control Self-Assessment's objectives? (5) |
Objectives of internal control are to ensure • Reliability and Integrity of Information • Compliance with policies, laws and regulations • Safeguarding of Assets • Economical and Efficient Use of Resources • Accomplishment of Objective and Goals |
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Why are Key Risk Indicators a useful complement to Control Assessment |
• KRI’s can be updated with a higher frequency • Keep the risk management process dynamic |
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Six Sigma and 4 improvements |
• Used for Process Improvement in High Volume Processing • Identifies and Eliminates issues: – Inefficiencies – Errors – Overlaps – Gaps in Communication |
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How to model Operational Risk (5 steps) |
For Operational Risk Sources 1. Indentify Exposure Base for each Risk 2. Measure Exposure for each business unit and risk source 3. Estimate the Loss potential per unit of exposure 4. Combine 2) and 3) to produce loss distribution 5. Estimate the impact of mitigation, process improvementsand risk transfer |
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List examples of Owner Education - in the context of Cycle Management (3) |
Good for owners to know: • some Ratios will not appear healthy during soft markets • Premium Volume will drop • Overhead Expenses to Premium will increase– this should be seen as an investment |
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What is Strategic Risk, according to Mango |
Intentional Risk Taking to meet an Organization’sGoals |
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What is Strategy, according to Mango |
A science and art of planning, using political,economic, psychological and organizationalresources, to achieve major organizational goals |
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GIRO definition of Strategy |
A strategy is a long term series of actions designedto take a company from its current state to itsdesired future state, and aims to provide asustainable competitive advantage over othercompanies in the same market. |
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Miller’s Definition of Risk |
Unpredictability in corporate outcomes (effects)This definition doesn’t align with our current definition ofrisk |
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Elements of Strategic Risk, by Baird & Thomas (4 out of 7) |
• Voluntariness of Exposure • Controllability of Consequences • Discounting in Time • Discounting in Space (shift risks to competitors) • Knowledge of Risky Situation • Magnitude of Risk • Group/Individual Factors |
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Categories of Risk - Slywotzky & Drzik (5 out of 7) |
• Industry - Capital Intensiveness, Overcapacity • Technology - Shift, Obsolescence • Brand - Erosion, Collapse • Competitor - Global Rivals, Unique Competitors • Customer - Priority Shift, Power • Project - Failure of R&D, IT • Stagnation - Flat Volume, Price Declines |
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Scenario Planning Description (3) |
• Limited Number of Scenarios • Test Scenarios for internal consistency; explore impact of several variables • Capture the richness of range of possibilities |
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Steps in Scenario Planning (10) |
1. Define the Scope 2. Identify Major Stakeholders 3. Identify Basic Trends 4. Identify Key Uncertainties 5. Construct Initial Scenario Themes 6. Check for Consistency and Plausibility 7. Develop Learning Scenarios 8. Identify Research Needs 9. Develop Quantitative Needs 10. Evolve toward Decision Scenarios |
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Advanced Scenario Planning |
• Stochastic Scenarios • Need to define Goals - profit, premium level ordownside constraints • Determine and Estimate EnvironmentalVariables - size of market, price level • Define Action Rules - hold price, increase capacity |
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Agent-Based Modeling |
• Program Agents into the Model • Each Agent Responds to the Market • This creates a Complex System with "emergentproperties" |
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Price Competition in Insurance Market is inevitable because (2) |
• Entry into the business is easy • Insurers have not been able to Patent, Copyrightor Franchise their product |
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Why is Price and Quantity difficult to define in Insurance (3) |
• Many details of the policy influence "price" • Deductible, Limits, Policy Terms • Quantity is difficult to determine for the samereasons |
