CAS Exam 7 Spring 2016, Question 21

Study guide: Exam 9

An insurance company has developed an Enterprise Risk Management (ERM) program with the following characteristics:

i. The process will be monitored on a regular basis.
ii. The ERM model only incorporates insurance hazard risk and financial risk.
iii. The company has excluded motorcycle liability from the ERM model because it is a short-tailed line of business, represents a small portion of the book, and is in run-off.
iv. The model only considers adverse scenarios, because if the outcomes turn out better than expected, there is no risk to the insurance company.
v. The insurance company writes both commercial lines and personal lines. Since the underwriting and pricing of these risks are handled by separate departments, there are two completely independent ERM models that exist for commercial lines and personal lines.

Describe whether each characteristic above is a strength or a weakness of the ERM program.

Part a (2.5 points)