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CISI – Managing Operational Risk in Financial Institutions – Joshua – Quiz 4
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Question 1 of 10
1. Question
⦁ The process of developing and setting risk management policy should involve many stakeholders, take some time and be tested with those responsible for implementing and complying with the policy. An in-use policy should be regularly reviewed, at least on an annual basis. In formulating risk management policies, what should the insurer address? (Select all that applies)
Correct
The process of developing and setting risk management policy should involve many stakeholders, take some time and be tested with those responsible for implementing and complying with the policy. An in-use policy should be regularly reviewed, at least on an annual basis.
In formulating risk management policy the insurer should address at least the following aspects:
• A clear risk management philosophy – for example outlining why risk management is important and the linkages with value creation
• The relationship between risk management and the insurer’s purpose or mission, values and strategic objectives
• How risk management is embedded in the related processes of capital management, pricing, reserving and performance managementIncorrect
The process of developing and setting risk management policy should involve many stakeholders, take some time and be tested with those responsible for implementing and complying with the policy. An in-use policy should be regularly reviewed, at least on an annual basis.
In formulating risk management policy the insurer should address at least the following aspects:
• A clear risk management philosophy – for example outlining why risk management is important and the linkages with value creation
• The relationship between risk management and the insurer’s purpose or mission, values and strategic objectives
• How risk management is embedded in the related processes of capital management, pricing, reserving and performance management -
Question 2 of 10
2. Question
For an insurer, which of the following parameters are used to articulate risk tolerance across financial and non-financial risks? (Select all that applies)
Correct
For an insurer, the following parameters are typically used to articulate risk tolerance across financial and non-financial risks:
• Lines of business that the insurer will/will not accept
• Earnings volatility
• Requirements to meet supervisory criteria including allowance for unexpected events
• Desired capital strength, usually by reference to a defined rating level of a recognised credit rating agency
• Maintaining levels of economic capital by reference to a specified chance of meeting policyholder obligations or target return periods for “risk of ruin”Incorrect
For an insurer, the following parameters are typically used to articulate risk tolerance across financial and non-financial risks:
• Lines of business that the insurer will/will not accept
• Earnings volatility
• Requirements to meet supervisory criteria including allowance for unexpected events
• Desired capital strength, usually by reference to a defined rating level of a recognised credit rating agency
• Maintaining levels of economic capital by reference to a specified chance of meeting policyholder obligations or target return periods for “risk of ruin” -
Question 3 of 10
3. Question
On the other hand, limits, being narrower in scope, tend to operate at the risk category level. Staying within limits would mean that an insurer will stay within its overall risk tolerance. The following are examples of risk limits except?
Correct
On the other hand, limits, being narrower in scope, tend to operate at the risk category level. Staying within limits should mean that an insurer will stay within its overall risk tolerance. Example of risk limits include:
• Establishing counterparty credit limits for investments and reinsurers
• Setting an overall target for credit quality for a reinsurance buying program, usually by reference to credit rating
• Establishing concentration limits for lines of business/products, geographies and counterparties
• Maintenance of underwriting and pricing principles and limitsIncorrect
On the other hand, limits, being narrower in scope, tend to operate at the risk category level. Staying within limits should mean that an insurer will stay within its overall risk tolerance. Example of risk limits include:
• Establishing counterparty credit limits for investments and reinsurers
• Setting an overall target for credit quality for a reinsurance buying program, usually by reference to credit rating
• Establishing concentration limits for lines of business/products, geographies and counterparties
• Maintenance of underwriting and pricing principles and limits -
Question 4 of 10
4. Question
When developing a position on risk tolerance, what questions need to be answered? (Select all that applies)
Correct
When developing a position on risk tolerance the questions to ask are:
• How comfortable are we in the continuing exposure to an individual or basket of risks given our Risk Profile (current and future), our Risk Capacity (current and future) and within the context of our strategic options or choices?
• Is there a build up or concentration of risk that makes us uncomfortable?
• In light of the risk exposure, are we satisfied with the level of return (and capital requirements) expected from the decision?
• What would be the level of regret if we took an alternative option/decision or bet under different future scenarios?Incorrect
When developing a position on risk tolerance the questions to ask are:
• How comfortable are we in the continuing exposure to an individual or basket of risks given our Risk Profile (current and future), our Risk Capacity (current and future) and within the context of our strategic options or choices?
• Is there a build up or concentration of risk that makes us uncomfortable?
• In light of the risk exposure, are we satisfied with the level of return (and capital requirements) expected from the decision?
• What would be the level of regret if we took an alternative option/decision or bet under different future scenarios? -
Question 5 of 10
5. Question
A key test of the effectiveness of an insurer’s ERM framework is the extent to which it caters for change. A framework geared only towards business as usual (BAU) activity may fail to prepare the organisation for shifts in market dynamics, supervisory change, changing customer preferences, global trends and so on. What factors influence an insurer’s risk profile? (Select all that applies)
Correct
A key test of the effectiveness of an insurer’s ERM framework is the extent to which it caters for change. A framework geared only towards business as usual (BAU) activity may fail to prepare the organisation for shifts in market dynamics, supervisory change, changing customer preferences, global trends and so on.
The insurer’s risk profile over time will be influenced by:
• Outputs from periodic risk assessments at the enterprise and business unit levels that have regard to BAU activities, new initiatives/strategies and external events (looking forward)
• Movements in key risk indicators (the present)
• Unexpected losses, and significant control failures or incidents (looking back).Incorrect
A key test of the effectiveness of an insurer’s ERM framework is the extent to which it caters for change. A framework geared only towards business as usual (BAU) activity may fail to prepare the organisation for shifts in market dynamics, supervisory change, changing customer preferences, global trends and so on.
The insurer’s risk profile over time will be influenced by:
• Outputs from periodic risk assessments at the enterprise and business unit levels that have regard to BAU activities, new initiatives/strategies and external events (looking forward)
• Movements in key risk indicators (the present)
• Unexpected losses, and significant control failures or incidents (looking back). -
Question 6 of 10
6. Question
Emerging risks may lead to claims with a high loss potential but may also represent a new business opportunity akin to “first-mover advantage”. The earlier these sorts of risks and/or opportunities are identified, the greater the room for action. A mature ERM framework will be addressing emerging risks and creating the conditions for dialogue between business functions and risk functions about strategies for dealing with them. What are the common characteristics of emerging risks? (Select all that applies)
Correct
Emerging risks may lead to claims with a high loss potential but may also represent a new business opportunity akin to “first-mover advantage”. The earlier these sorts of risks and/or opportunities are identified, the greater the room for action. A mature ERM framework will be addressing emerging risks and creating the conditions for dialogue between business functions and risk functions about strategies for dealing with them. The common characteristics of emerging risks are:
• High uncertainty as there is little information available and the frequency and severity4
• Difficulty in quantification as risk is uncertain and the risk transfer may be questionable is difficult to assess
• No industry position as no single insurer wants to make the first move for fear of losing market share
• Difficulties for risk communication as there is the danger of reacting to phantom risks
• Supervisory involvement is often necessary.Incorrect
Emerging risks may lead to claims with a high loss potential but may also represent a new business opportunity akin to “first-mover advantage”. The earlier these sorts of risks and/or opportunities are identified, the greater the room for action. A mature ERM framework will be addressing emerging risks and creating the conditions for dialogue between business functions and risk functions about strategies for dealing with them. The common characteristics of emerging risks are:
• High uncertainty as there is little information available and the frequency and severity4
• Difficulty in quantification as risk is uncertain and the risk transfer may be questionable is difficult to assess
• No industry position as no single insurer wants to make the first move for fear of losing market share
• Difficulties for risk communication as there is the danger of reacting to phantom risks
• Supervisory involvement is often necessary. -
Question 7 of 10
7. Question
What are the three main phases of the risk profiling process? (Select all that applies)
Correct
The risk profiling process is comprised of three main phases:
1. Preparation – The objective of risk profiling is to provide the business with a structured approach to recording and assessing risk. This facilitates the common understanding and articulation of risk. Therefore, it is useful to prepare any existing material prior to the risk profiling exercise to assist the process of identifying and assessing risk and controls.
2. Risk Profiling Exercise – The risk profiling exercise should be facilitated by a risk champion from the business to provide guidance and help drive consistency of the process. Business involvement is key to the successful completion of the risk profile as it effectively ensures accurate capture of risks. There will need to be an initial investment of time to complete the risk profile and an ongoing commitment to maintaining it. The amount of time required will vary dependent on the approach used to complete the risk profiling exercise (e.g. workshops vs. one-on-one meetings).
3. Review – Following the risk profiling exercise, a review should be undertaken by the risk champion to ensure the outputs of the meeting have been recorded accurately and agreed by management.Incorrect
The risk profiling process is comprised of three main phases:
1. Preparation – The objective of risk profiling is to provide the business with a structured approach to recording and assessing risk. This facilitates the common understanding and articulation of risk. Therefore, it is useful to prepare any existing material prior to the risk profiling exercise to assist the process of identifying and assessing risk and controls.
2. Risk Profiling Exercise – The risk profiling exercise should be facilitated by a risk champion from the business to provide guidance and help drive consistency of the process. Business involvement is key to the successful completion of the risk profile as it effectively ensures accurate capture of risks. There will need to be an initial investment of time to complete the risk profile and an ongoing commitment to maintaining it. The amount of time required will vary dependent on the approach used to complete the risk profiling exercise (e.g. workshops vs. one-on-one meetings).
3. Review – Following the risk profiling exercise, a review should be undertaken by the risk champion to ensure the outputs of the meeting have been recorded accurately and agreed by management. -
Question 8 of 10
8. Question
The following are the benefits of risk profiling except
Correct
Key benefits of risk profiling are:
• A structured process that promotes consistency for risk profiling across the organisation
• Collation of risk related material before the risk profile exercise provides participants with a good starting position for risk profiling
• Both risk expertise and business knowledge being used to risk profile
• Promoting transparency of risk profiling
• Time efficiency for risk profiling
• Clear linkage between risks and controls.Incorrect
Key benefits of risk profiling are:
• A structured process that promotes consistency for risk profiling across the organisation
• Collation of risk related material before the risk profile exercise provides participants with a good starting position for risk profiling
• Both risk expertise and business knowledge being used to risk profile
• Promoting transparency of risk profiling
• Time efficiency for risk profiling
• Clear linkage between risks and controls. -
Question 9 of 10
9. Question
The Risk Committee’s primary purpose is to perform centralised oversight, policy-setting, information gathering, and communication to the Board of Directors, regarding important risks and its related risk management activities. The following are the responsibilities of the Risk Committee except
Correct
The Risk Committee’s primary purpose is to perform centralised oversight, policy-setting, information gathering, and communication to the Board of Directors, regarding important risks and its related risk management activities. In addition, the Committee shall assist the Board of Directors in fulfilling its oversight responsibilities related to the company’s risk assessment and management processes.
RESPONSIBILITIES
• The Risk Committee shall be responsible for the following activities:
• Identify and monitor important existing and emerging risks to the achievement of the company’s strategic and operating objectives.
• Formulate appropriate policies and monitoring and reporting frameworks to support effective management of important risks.
• Review and evaluate the effectiveness of management processes and action plans to address such risks.Incorrect
The Risk Committee’s primary purpose is to perform centralised oversight, policy-setting, information gathering, and communication to the Board of Directors, regarding important risks and its related risk management activities. In addition, the Committee shall assist the Board of Directors in fulfilling its oversight responsibilities related to the company’s risk assessment and management processes.
RESPONSIBILITIES
• The Risk Committee shall be responsible for the following activities:
• Identify and monitor important existing and emerging risks to the achievement of the company’s strategic and operating objectives.
• Formulate appropriate policies and monitoring and reporting frameworks to support effective management of important risks.
• Review and evaluate the effectiveness of management processes and action plans to address such risks. -
Question 10 of 10
10. Question
There are several methods that can be employed in risk management, the risk manager has purchased an insurance policy, what risk management strategy has he employed?
Correct
An organisation can transfer some of its risk to an insurance company by purchasing an insurance policy
Incorrect