CAS Exam 7 Spring 2018, Question 23

Study guide: Exam 9

A large insurance company has developed an Enterprise Risk Management (ERM) model which has the following characteristics:

i. The ERM model will be maintained by internal employees across various functions (including actuarial, underwriting and planning) who will work on the model in addition to their regular duties.
ii. The insurance company is exposed to a significant amount of earthquake risk. To quantify its earthquake risk, the company uses a single earthquake model from a third-party vendor.
iii. The ERM model incorporates correlation among the insurance company's different lines of business using parameters developed individually by each line of business leader.
iv. The insurance company reviews the simulation results from the ERM model and sets its capital requirements based solely on the amount required to achieve a sufficiently small probability of default.

Describe one weakness of each characteristic above and propose a possible improvement to address each weakness.

Part a (2 points)