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Part 1 (Module 1 - 7): Q&A

Development Questions

  1. Definition of ERM

    • No single definitions
    • Application of risk management across the whole enterprise in a structured and consistent way
    • Consider all risks faced by an enterprise and how the risk interact with each other
    • Take into account interactions when deciding on how to deal with the risk
    • Intergrate risk measurement and management into business processes \(\Rightarrow\) Risk information can influence all strategic business decisions

  1. Counterpoint to the “ERM fad”, importance of ERM, and benefits

    • ERM is natural evolution of risk management
    • Discuss benefits of RM
    • Discuss benefits of formal risk communication
    • In the long run, alternative to ERM is crisis managment
    • How ERM adds value
      • Consider upside risk
      • Aid in exploiting any opportunities identifies before competitors
      • Understanding current level of risk can identify potentional scope to take on more risk

  1. Definition of market, credit and op-risk

    • See notes

  1. Describe types of legal risks and how to identify, assess and monitor its exposure

    • New legistation or change

      e.g. new market from deregulation; additional compliance costs

      Keep in touch with developments in the legal and supervisory environment

      • Monitor lobby groups, political development, countr judegements, foreign country legistlative development

    • Contract provisions

      e.g. poor contract wording; conditional clauses

      Review contracts; can model how the conditional clauses might be triggered

    • Legal rulings

      e.g. legal cost; changing process from ruling; loss of reputation

  1. Financial contagion

    • See notes
    • List out the different examples from Mod 3 Contagion section

  1. Credit spread (Market or credit risk)

    • Describe why it should be market but it’s not universal

  1. How to classify the risk category for IT hacking

    • Why it could be social, tech, op, or legal

  1. Examples of:

    Financial risks with differing level sof volatility

    Financial risk with foreign investment not concerned with currency movement

    2 types of interest rate risk (Check with module again)

    • credit card vs mortgage
    • Inability to transfer currency across national borders
    • Effect of a change in short term interest rates by a central bank
    • Effect of an increase in interest rates on consumers’ disposable income

  1. Recommendations of the Cadbury Report into corporate governance

    • See Mod 4 notes
    • \(\star\) The purpose listed in the solution is worth reading through though mostly straightforward

  1. Arguement for: highlevel principle based rules vs detailed prescriptive rules for corporate governance

    • Principles based:

      • Corporate landscape too diverse, no one set of rules will be suitable in all circumstances
      • Detailed rule can cause moral hazard, whereby professionals feel less inclined to behave in a moral way, and are tempted to see the rules as hurdles to overcome

    • Detailed percriptive based:

      • Easier to enforce and police
      • Give public confidence that annual reports and executive behavior are being controlled and monitored
      • More level playing field as all players have to comply with the same rules

  1. Best practice w.r.t ensuring independence of the Board

    • BoD majority NED
    • Subcommittees exclusively NEDs
    • CEO not the chair of the board (else give rationale)
    • BoD should meet regularly without the CEO
    • NED should meed independently of EDs at least annually

  1. Best practice w.r.t. Board compensation arrangements

    • Set objects for CEO and appraise aginst
      • Should include reference to ris management
    • Majority should be in terms of shares
      • With vesting schedules and clawback provisions
    • Board remuneration should should be disclosed

  1. Describe the following

    • Listing Rules

      What companies must achieve before listing shares

      Incl. corporate governance, accounting, and disclosure issues

      Have to continue to comply

    • UKLA

      Branch of FCA that deals with managing the listing of new companies on the UK stock exchange and ongoing monitoring of companies already listed

    • AIM

      Stock market that list many smaller companies whose shares are too thinely traded to justify inclusion on the main stock market

      Enables smaller companies to gain access to capital from the London markets

    • Office of Fair Trading

      Body that monitors and regulates the stock exchange itself

      Looks into issues of liquidity, membership restrictions, membership fees, M&A

  1. Why might UKLA delist a company

    • Misleading information on the company’s performance
    • Failure to comply with the listing criteria (e.g. frequently published information, directors’ share dealings, minimum 25% of the shares freely available in the market etc)
    • Inappropriate behavior (e.g. treating s/h unfairly)

  1. 6 Advantages of SII over SI

    1. More entity specific, more sensitive to the risks exposed
    2. Deal with asset side as well
    3. Capture market, credit and op-risk (inaddition to insurance risk)
    4. Risk mitigation techniques are taken into account (not everything is capital related)
    5. More prospective (account for future business plan and potential CAT)
    6. Diversification across sector
    7. Consistent with Basel
    8. Consistent across EU (good for multinationals)

  1. COSO Framework

    • See Mod 5 COSO Cube
    • All the dimensions and all the items

  1. 8 Stage of RAMP

    • Module 6
    1. Launch
    2. Risk identification
    3. Risk analysis
    4. Financial evaluation
    5. Risk mitigation
    6. go/no-go decision
    7. Risk control
    8. Closedown

  1. how to measure extreme events and 4 potential events

    • Based on Mod 7
    • Model
    • Stress and scenario testing
    • Imagine potential scenarios (not just past events)
    • Look at effect on key variables (e.g reputation, liquidity, gearing, asset cover, income cover, capital)
    • Impact of reinsurance
    • Example events: terrorism, natural disaster, IT failures, power failures, market crash

Exam Style Questions