This article provides a detailed overview of some recent articles on risk management of insurance companies. It discusses risk management motivation, matching assets and liabilities through the use of derivative financial instruments, risk securitization and the use of hybrid financial products by insurers. It covers four risks often found in insurer’s portfolios: actuarial risk, systematic risk, credit risk and liquidity risk.
Insurance companies want to eliminate some risks. Therefore, customers transfer their insured risks to an insurance company, which, however, must effectively manage them in order to avoid catastrophic scenarios that could jeopardize the financial position of the company and thereby maintain its profitability.
As a rule, the client pays an insurance premium in order to be entitled to compensation in accordance with the terms of the insurance contract. The type of event giving the right to compensation varies depending on the type of insurance requested by the policyholder. We can talk about both non-financial risks (car insurance) and financial risks (for example, “credit default swap”). It is important to understand that insurance companies are trying to quantify the risk that they take on to determine what premium that accrues with all premiums of the insured will be used to compensate for the compensation that will have to be done when an insured event occurs.
These accumulated premiums are now invested in low-risk assets, such as bonds, and are withdrawn when a claim arises. In a word, regardless of insurance risk, the basic principle of insurance is the same. One of the most important tasks of the insurance company in the process of its activity is the effective management of the risks to which it is exposed through customer insurance. These risks can be classified as follows: actuarial risk, systematic risk, credit risk, liquidity risk, operational risk and legal risk. These six types of risk will be discussed in more detail in this work, but it is important to note that we will focus on the first four, because these are those that may be covered by financial products. Recall, let’s make a simple distinction between non-financial and financial risks.
In simple terms, non-financial risk is a possible, unpredictable danger. Predictability will eliminate uncertainty about its insurance. The Civil Code classifies insured non-financial risks into two main categories of insurance, namely marine and land insurance, which are also divided into risks for people and risks of damage (property or liability). Some of them are risks directly related to nature (earthquakes, floods, volcanoes, etc.).
Others are man-made (technological risks, air hazards, automobile risks, industrial accidents, oil pollution, broken equipment, etc.). We also note the classification between direct risks (fire) and indirect risks (operating losses). Finally, the so-called stochastic risks do not cause direct harm, but increase the likelihood of other risks (for example, smoking and inhaling tobacco indirectly increases the likelihood of lung cancer). The list of risks is constantly growing due to technological progress, but it is important to emphasize that risks are measured by two parameters: their probability or frequency and their seriousness or seriousness.
Claim settlement. The insurer offers a series of guarantees to subscribers who are called takers in the legal language, who choose coverings that they consider suitable, taking into account their activities, the required premium and contract terms (conditions, exclusions, deductibles, joint insurance, etc.). Insurance is essentially a proposal to the contract. The contract is implemented by accepting the policyholder (the insured). It is impossible to completely control the risk, therefore, the insurer is fully interested in the insured trying to control his insured risks as much as possible, which reduces the likelihood of realization, and therefore premiums, and that increases his insurance portfolio.