enterprise risk management; insurance industry; solvency-II; three pillar approach; insurance industry–value drivers; financial risk; operational risks; business risks; committee of sponsoring organizations of the treadway commission; enterprise risk management framework; capital requirement; supervisory review process; asset liability management; risk-based marketing; performance management; external rating
The paper is divided into the following sections:
The first talks about the types of risks that are present in the insurance business. The second talks about the individual impact of each of these risks has on the insurance firm
Challenges faced by the insurance firms
On liabilty side
relaibility and availability of actuarial data is a challenge. Pricing is unregulted while the contract is a long term contract. On asset side
volatiltiy in credit and interest rate markets
Are there any unique risks faced by Indian insurance firms??
Therefore what are the risk minimization approaches that are adopted by Indian firms..adopted by foreign firms...?
what about the regulations in indian insurance insudustry..is it lighter than regulation abroad?? What can you suggest be done in the future to ward off a crisis in the insurance sector?
Risk management in Indian Insurance Sector-is it getting the importance it deserves?
For an insurance company risk is more intergrated in the business model than perhaps any other insustry. An insurance company is a warehouse of risk since its business model rests on the ability of the insurer to pool the risks and be able to price them adequately together various is to be paid for acquiring risk. Hence it is critical that the insurer acquires only as much risk as it can manage and makes sure that it does not get underpaid for managing that risk. While risks can be classified in many ways, for the pupose of insurance, actuaries follow the system of classification proposed by the Society of Actuaries’ Committee on Valuation and Related Problems[Black & Skipper,1997]. The various categories of risks are dubbed C-1, C-2, C-3, and C-4, deriving these names from the Committee recommendations . We begin by providing the industry’s own definitions:
C-1 risk (asset risk) is the risk that the insurer will lose asset value on its investment in such assets as stocks, bonds,mortgages and real estate. This arises from the possibility that borrowers of insurer funds may default on their obligations to the company.
C-2 risk(pricing risk) is the risk that the insurer's experience with mortality or expenses will differ significantly from expectations,causing the insurer to lose money on its products. If an insurer’s pricing is based on assumptions that prove inadequate, it may not be able to meet its obligations to policy owners.
C-3 risk(interest-rate risk) springs from the impact of fluctuating interest and inflation rates causing the insurer to lose money on its products. If the impact of fluctuating rates is different on assets than on liabilities, the values of assets and liabilities will change by different amounts, and could expose the insurer to insolvency.
C-4 risks( general management risks), stem from the insurer's ineffective general business practices. These risks include tax and regulatory changes, poor training of employees and sales agents, and fraud by managers or other employees.
For Indian insurers 85% of their total investable assets have to be in government or govt approved securitites. Hence the deafult risk of an insureres assets is low in India 1)Credit risk is the risk that a borrower will not perform in accordance with its obligations. Credit risk may arise from either an inability or unwillingness on the part of the borrower to perform in the pre-committed contracted manner. This can affect the investor holding the bond or lender of a loan contract, as well as other investors and lenders to the...
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