Abstract
This chapter contains a high level description of the risk management process at insurance companies. This process has three stages, identification of risk, evaluation of risks, and the response to risks that have been evaluated. The chapter closes with general remarks on the role of the actuary in risk management.
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Notes
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KonTraG stands for “Gesetz zur Kontrolle und Transparenz im Unternehmensbereich” (Control and Transparency in Business Act), a German law introduced on the 1st of May, 1998. The main consequence of KonTraG is the mandatory use of early warning and risk management systems. http://www.grc-resource.com/?page_id=21.
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The Solvency II Directive 2009/138/EC is an European Union (EU) Directive that codifies and harmonizes the EU insurance regulation. Primarily this concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. http://en.wikipedia.org/wiki/Solvency_II_Directive.
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MaRisk stands for “Mindestanforderungen an das Risikomanagement” (minimum requirements for risk management), a German ordinance introduced in December 2005. http://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/fa_bj_2012-08_marisk_en.html.
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Risk control may not be a separate function or department but could instead be a collection of tasks performed by the risk management department.
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In 2008 the transactions made by Jérôme Kerviell cost the Société Générale a loss of 5 billion Euros. Though the loss was primarily the result of a crisis in the market, its origin was a manifestation of management risk: breakdown of the 4-eyes principle (double signatures), by-passing control mechanisms by using forged email and by forgoing vacation.
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Munich Hail: In 1984 a hailstorm in Munich led to economic damage to the extent of 3 billion DM (Deutschmark), of which 1.5 billion DM were insured.
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Wiehl Valley Bridge: In 2004, after a collision with a car whose driver was under the influence of drugs and had no driver’s license, a tanker semi-trailer loaded with 32,000 liters of gasoline (petrol) fell from the bridge over the Wiehl Valley. The bridge was badly damaged by the resulting fire and had to be closed. The damages were of the order of 30 million Euros.
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In practice the failure of a reinsurer is more likely if a catastrophe has produced very high losses for a number of primary insurers. The primary insurance risk and the secondary risk are thus not independent.
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Basel II is the second of the Basel Accords. Basel II comprises recommendations on banking laws and regulations originally issued by the Basel Committee on Banking Supervision in June 2004. It is now extended and partially superseded by Basel III.
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The Solvency II Directive 2009/138/EC codifies and harmonizes the European Union insurance regulation. Solvency II represents a holistic approach to solvency regulation with an emphasis on the risk-based calculation of solvency capital, on risk management, and on public disclosure.
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While the signing quota deals with the shifting of risks to the pool, the pool quota quantifies the portion of the risk borne by a pool member.
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Presently the German supervisory authority requires a significant transfer of risk since otherwise it considers the reinsurance contract as a loan, which is not allowed in this context.
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VAG stands for “Versicherungsaufsichtsgesetz” and is the German Insurance Supervisory Act.
References
Basel Committee on Banking Supervision, International convergence of capital measurement and capital standards. A revised framework comprehensive version, June 2006
Commission of the European Communities, Directive of the European Parliament and the Council on the taking-up and pursuit of the business of insurance and reinsurance, Solvency II (recast), November 2009. PE-CONS 3643/6/09 REV 6, approved by the European Parliament on 2009-04-22
Conference of Insurance Supervisory Services of the Member States of the European Union, Prudential supervision of insurance undertakings, December 2002. Sharma-Report
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Kriele, M., Wolf, J. (2014). The Process of Risk Management. In: Value-Oriented Risk Management of Insurance Companies. EAA Series. Springer, London. https://doi.org/10.1007/978-1-4471-6305-3_1
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