Risk Management in a Life Insurance Company – Overview

Risk management is a core business practice and, to be truly effective, the company must ensure that risk management is embedded in its culture. Insurance companies have been dealing with risk management for hundreds of years. Companies should take into account the consistency of risk limits and control processes in their functions and determine whether there is consistency. After a consistent sequence of limit values ​​and control processes has taken place, the company must develop a process to report the risk position of all the various activities.

As usual at many banks, the CEO has to make a daily report on the corporate risk position that is aggregated on a single sheet of paper. Risk management is directly linked to capital allocation. If products have to keep their capital in proportion to their risks, then risk-adjusted returns can be measured. Capital investment based on a risk-adjusted return optimizes the return on capital rather than guiding the company to maximize investments in high yield high risk products. Risk-proportional distribution of capital may involve practical measurement problems and companies may return using risk-based or credit rating agency formulas. The danger lies in giving Product Managers the opportunity to focus on the simplified formula for the current risk.

Another major obstacle is the implementation of a modern risk management tool that adequately reflects the correlation of risks. Perhaps the self-assessed risks need not be combined. The low correlations of the various risks managed by life insurers have not been examined extensively and even 100 years before sufficient data can be collected. Just as risk limits and audit procedures need to be consistent, the use of risk management tools must be consistently applied to the company's risks to the desired form. This should be considered on a risk and cost-justified basis. Ultimately, risk management can be integrated into all operational, financial and strategic decision-making processes.

Risk-adjusted pricing is one of the tools you can achieve this. The random process manufacturing scenarios are applied to the projected profits of all products for risk-adjusted pricing. Alternative investment, insurance, pricing and product design strategies can be tested on multiple stochastic scenarios.

The regulation of life insurance with a high investment component depends on the regulator's objectives and the range of products offered. Risk management of products may involve the use of sophisticated financial instruments, but the use of these tools may also pose a risk. Regulators need to balance the need for regulatory simplicity with the need to authorize product innovation.

Source by sbobet

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