Which of the following are elements of ‘group risk’:

Which of the following are elements of ‘group risk’:

I. Market risk

II. Intra-group exposures

III. Reputational contagion

IV. Complex group structures
A . II, III and IV
B . II and III
C . I and IV
D . I and II

View Answer

Answer: A

Explanation:

The term ‘group risk’ has been defined in the FSA document 08/24 on stress testing as the risk that a firm may be adversely affected by an occurrence (financial or non-financial) in another group entity or an occurrence that affects ther group as a whole.

These risks may occur through:

– reputational contagion,

– financial contagion,

– leveraging,

– double or multiple gearing,

– concentrations and large exposures (particularly intra-group).

Thus, the insurance sector may be considered a group, and a firm may suffer just because another group firm has had losses or reputational issues.

The FSA statement goes on to identify some elements of group risk as follows:

– intra-group exposures (credit or operational exposures through outsourcing or service arrangements, as well as more standard business exposures);

– concentration risks (from credit, market or insurance risks which could put a strain on capital resources across entities simultaneously);

– contagion (reputational damage, operational or financial pressures); and

– complex group structures (with dependencies, complex split of responsibilities and accountabilities).

Therefore Choice ‘a’ is the correct answer and the rest of the choices are incorrect.