Chapter 16 ERA 1.1 - 1.3 Introduction - Brehm, et al.

Requirements to promote ERM

• External pressure and internal champion

Definition of ERM 16.1

7 key aspect of ERM

4 categories of risk

Enterprise risk model process

1. Diagnose:

   • Develop threshold for all risk in the 3 different categories 16.1

2. Analyze:

   • Prioritize and analyze material risk and correlation

   • Critical risk 16.2

3. Implement:

   • 5 ways to manage the risk: avoid, reduce frequency, mitigate severity, transfer, or retain

4. Monitor the process:

   • Update new risk, ways to control or options to transfer/treating the risk

Goal of enterprise risk model and how it help with management functions and strategic decisions

Model quality

• Good vs bad model

• \(\star\) 4 Key elements that differentiate (for the model and modelers)

• 3 Factors that impact the suitability and usefulness of the model

4 key elements of enterprise risk model:

• Underwriting risk:

  Freq & sev, pricing, parameter (estimation, projection, event and systematic) and cat model

• Reserving risk:

• Asset risk for different class of assets:

  (Bonds, equities, FX, etc)

• Dependencies, its various sources and how to model them

\(\star\) Approach to setting capital based on default avoidance or threshold lower than probability of ruin

Capital allocation