ERM FINAL EXAM QUESTIONS & ANSWERS 2024/2025
what is the goal of ERM? - ANSWERSto manage individual businesses within overall business portfolio
what are the 4 benefits of active portfolio management? - ANSWERS1. UNBUNDLING in terms of risk origination, retention, and transfer
2. RISK AG...
what is the goal of ERM? - ANSWERSto manage individual businesses within overall business portfolio
what are the 4 benefits of active portfolio management? - ANSWERS1. UNBUNDLING in terms of risk
origination, retention, and transfer
2. RISK AGGREGATION across the whole company
3. setting RISK LIMITS & ASSET-ALLOCATION TARGETS
4. influencing TRANSFER PRICING, CAPITAL ALLOCATION, and INVESTMENT DECISIONS
explain:
UNBUNDLING in terms of risk origination, retention, and transfer - ANSWERSmanagement can decide
where within the value chain it should compete by considering its core competencies & risk/return
economies
explain:
RISK AGGREGATION across the whole company - ANSWERSthe risk portfolio = all the risks within the
company
management needs this info & how they relate to each other in order to set limits & targets
explain:
, setting RISK LIMITS & ASSET-ALLOCATION TARGETS - ANSWERScomplementary controls for optimal
risk/return for the business
explain:
influencing TRANSFER PRICING, CAPITAL ALLOCATION, and INVESTMENT DECISIONS - ANSWERSallocate
more $$$ to businesses/products with better risk/return
explain the WindGuard case study - ANSWERSinsurance companies, in addition to conducting normal
insurance business, also often have publicly traded equity - thus, shareholder happiness is important to
them.
when the insurance company's risk profile is greater than desired, they can purchase REINSURANCE
(which is insurance for insurance companies); this is important because insurance is very risky already.
the value of an insurance company is in its ability to forecast risk & price contracts well - any leftover $ is
profit.
hurricane Andrew was an example that a severe natural disaster could bankrupt a company if they are
unprepared to payout.
in this case:
WindGuard, a FL insurance company, specializes in providing insurance to homeowners against damages
caused by natural disasters. Historically, they had performed well due to mild-weather and well-priced
contracts.
Management is concerned that the weather would get worse in the years to come; they worried about
loss volatility and not being able to pay out.
While WG still has expected return/profit amount - the risk is now greater than the company can afford.
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