Assignment
- Summarise the main reforms introduced by Basel III.
An insurance group has a corporate bond portfolio. One of the larger investments in this portfolio has recently defaulted. It was a jewellery maker. As a result, the debt instruments that the firm held have been converted into equity and the firm now finds itself owning 55% of the equity of the jewellery maker.
- Indicate potential risk management activities that this might trigger for the group’s central risk team.
- Summarise:
- The main roles that the group’s central risk team might undertake
- Stakeholders likely to be interested in how successful the team is at these roles
- Summarise:
- The main risk policies EIOPA guidance expects an insurance group to have in place
- Ways in which the group’s central risk team may have contributed to these policies
- Governance requirements EIOPA guidance expects the group to have followed when
An international airline company is considering taking over a small bank that has developed a range of innovative online banking services that it offers to retail customers. These services include foreign currency payment services and a platform offering a range of “feeder funds” that allow customers to gain exposure to investment funds provided by selected third-party fund managers. The strategic rationale for the proposed take-over is that the airline can introduce its customers to the bank and vice-versa. The bank is just about to add to this platform a range of investment funds that it will manage itself (through a newly established asset management subsidiary).
- Assess the risks that such a business expansion might introduce to the airline.
- Discuss:
- The typical components of an economic capital model
- How such a model might be used by an airline or by a bank
- How the output of economic capital models might help either or both of these parties when negotiating the terms of such a transaction
One of a firm’s business units has suffered the following operational risk losses in the last 40 consecutive quarters:
| Quarter Ending | Loss (£m) | Quarter Ending | Loss (£m) | Quarter Ending | Loss (£m) | Quarter Ending | Loss (£m) |
| 31/03/12 | – | 30/09/14 | 0.2 | 31/03/17 | 1.1 | 30/09/19 | – |
| 30/06/12 | 0.3 | 31/12/14 | – | 30/06/17 | 0.1 | 31/12/19 | – |
| 30/09/12 | 0.2 | 31/03/15 | – | 30/09/17 | 0.2 | 31/03/20 | – |
| 31/12/12 | – | 30/06/15 | 0.6 | 31/12/17 | 1.8 | 30/06/20 | 0.1 |
| 31/03/13 | – | 30/09/15 | – | 31/03/18 | 0.2 | 30/09/20 | 3.2 |
| 30/06/13 | – | 31/12/15 | 0.1 | 30/06/18 | – | 31/12/20 | 0.1 |
| 30/09/13 | 0.2 | 31/03/16 | – | 30/09/18 | 0.5 | 31/03/21 | – |
| 31/12/13 | 0.6 | 30/06/16 | 0.3 | 31/12/18 | 0.1 | 30/06/21 | 0.3 |
| 31/03/14 | 0.7 | 30/09/16 | 0.9 | 31/03/19 | 0.6 | 30/09/21 | 0.3 |
| 30/06/14 | 0.3 | 31/12/16 | – | 30/06/19 | – | 31/12/21 | 1.8 |
The firm has asked its risk management team to estimate (i) a 95% and (ii) a 99% confidence level 1-year Value-at-Risk (VaR) for operational risk for the business unit:
- Using only the above data, prepare estimates of these two VaR risk measures as at 31/12/2021, stating all assumptions you have adopted, explaining your choice of statistical methodology and providing your working
- Suggest additional data you might be able to obtain that would be likely to make your estimates more accurate
Take all number rank them in order, all quarterly numbers
- Describe how an equity-based portfolio credit risk model differs from a ratings-based portfolio credit risk model, and the main instrument types that are hard to cater for in one or both of these model types.