FRM Part II · FRM Exam Part II · Risk Mitigation
A risk manager is evaluating insurance as an operational risk mitigant and notes that the insurer may take a long time to pay, may dispute coverage, or may become insolvent. Which risk is the manager describing?
The manager is describing counterparty and payment uncertainty risk. Slow payment, disputed coverage and insurer insolvency mean the expected recovery may not arrive when needed, which weakens the risk transfer and means insurance cannot be treated as a perfect substitute for controls.
- ABasis risk arising from mismatch between insured events and losses
- BResidual risk from the inherent risk assessment
- CCounterparty and payment uncertainty risk that reduces the effectiveness of the transferCorrect
- DModel risk in the loss distribution approach
Explanation
Delays, coverage disputes and insurer default concern whether the insurer will actually pay, so the transfer is less certain. Basis risk concerns policy wording mismatch with actual losses, not payment reliability. Hence the counterparty/payment uncertainty concern is the one described.
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