Emerald | Journal of Risk Finance, The | Table of Contents

Assessing the Model Risk with Respect to the Interest Rate Term Structure under Solvency II

literatinetwork@emeraldinsight.com (Michael Martin) — Fri, 17 May 2013 00:00:00 +0100

Abstract

Purpose - Interest rate risk, i.e. the risk of changes in the interest rate term structure, is of high relevance in insurers’ risk management. Due to large capital investments in interest rate sensitive assets such as bonds, interest rate risk plays a considerable role for deriving the solvency capital requirement (SCR) in the context of Solvency II.Design/methodology/approach - In addition to the Solvency II standard model, we apply the model of Gatzert and Martin (2012) for introducing a partial internal model for the market risk of bond exposures. After introducing calibration methods for short rate models, we quantify interest rate and credit risk for corporate and government bonds and demonstrate that the type of process can have a considerable impact despite comparable underlying input data.Findings - The results show that, in general, the SCR for interest rate risk derived from the standard model of Solvency II tends to the SCR achieved by the short rate model from Vasicek (1977), while the application of the Cox, Ingersoll, and Ross (1985) model leads to a lower SCR. For low-rated bonds, the internal models approximate each other and, moreover, show a considerable underestimation of credit risk in the Solvency II model.Originality/value - The aim of this paper is to assess model risk with focus on bonds in the market risk module of Solvency II regarding the underlying interest rate process and input parameters.

Modeling Parameter Risk in Premium Risk in Multi-Year Internal Models

literatinetwork@emeraldinsight.com (Dorothea Diers, Martin Eling, Marc Linde) — Fri, 17 May 2013 00:00:00 +0100

Abstract

Purpose - The purpose of this paper is to illustrate the importance of modeling parameter risk in premium risk, especially when data are scarce and a multi-year projection horizon is considered. Internal risk models often integrate both process and parameter risks in modeling reserve risk, whereas parameter risk is typically omitted in premium risk, the modeling of which considers only process risk.Design/methodology/approach - We present a variety of methods for modeling parameter risk (asymptotic normality, bootstrap, Bayesian) with different statistical properties. We then integrate these different modeling approaches in an internal risk model and compare our results with those from modeling approaches that measure only process risk in premium risk.Findings - We show that parameter risk is substantial, especially when a multi-year projection horizon is considered and when there is only limited historical data available for parameterization (as is often the case in practice). Our results also demonstrate that parameter risk substantially influences risk-based capital and strategic management decisions, such as reinsurance.Practical implications - Our findings emphasize that it is necessary to integrate parameter risk in risk modeling. Our findings are thus not only of interest to academics, but of high relevance to practitioners and regulators working toward appropriate risk modeling in an enterprise risk management and solvency context.Originality/value - To our knowledge, there are no model approaches or studies on parameter uncertainty for projection periods of not just one, but several, accident years; however, consideration of multiple years is crucial when thinking strategically about enterprise risk management.

EARTHQUAKE INSURANCE FOR GREECE: COMPARATIVE ANALYSIS AND PRICING ISSUES

literatinetwork@emeraldinsight.com (MILTON NEKTARIOS, Aglaia Petseti) — Fri, 17 May 2013 00:00:00 +0100

Abstract

Purpose - The present article serves two main goals. First, the proposed scheme for Greece is being involved in a benchmarking analysis. Second, an expansion of previous quantitative models is undertaken in order to estimate risk-based premiums for the proposed national insurance scheme.Design/methodology/approach - The benchmarking analysis of the proposed scheme is undertaken in comparison to the best practices of the catastrophe insurance systems operating in most member-states of the EU. Risk modelling is employed to calculate risk-based premiums.Findings - The benchmarking analysis leads to conclusions which may be useful for the stage of actual implementation of such a program in Greece. Risk-based premiums for the proposed national insurance scheme are estmated for all Cresta Zones of the country.Research limitations/implications - Uncertainty of estimated catastrophe losses.Practical implications - Detailed description of proposd earthquake insurance scheme.Originality/value - Construction of a unique data bank of the residential stock of Greece. Comprehensive proposal for earthquake insurance, based on the best practices of national Cat insurance schemes.

Modeling the Effect of CEO Power on Efficiency: Evidence from the European Non-Life Insurance Market

Fri, 17 May 2013 00:00:00 +0100

Abstract

Purpose - Many factors like CEO "the chief executive officer" decision can influence the efficiency and productivity in the insurance firms.Design/methodology/approach - To test the effect of the CEO power on the efficiency and the productivity of the European insurance industries, we use the Flexible Fourier cost function and we decompose the Total factor productivity growth Findings - The result shows that after the integration of the CEO power score, not only efficiency scores in each country have changed, but also the order of non life insurance systems. Also, the CEO power influence the growth of the productivity and an optimal power of the CEO can allow the insurance firm to be more productive and more efficient.Originality/value - In this paper we model a new cost function in which we include the CEO power score, also we decompose the total factor of productivity in which we include the effect of the growth in the CEO power score.

THE FINANCIAL PERFORMANCE OF LIFE INSURANCE COMPANIES IN GHANA

Fri, 17 May 2013 00:00:00 +0100

Abstract

Purpose - The aim of this research is to assess the financial performance of the life insurance industry of an emerging economy. In particular the study delves into the major determinants of the profitability of the life insurance industry of Ghana. The study also examines the relationship among the three measures of insurers’ profitability, which are investment income, underwriting profit and the overall (total) net profitDesign/methodology/approach - The annual financial statements of ten (10) life insurance companies covering a period of eleven years (2000 to 2010) were sampled and analyzed through panel regression.Findings - The findings indicate that whereas gross written premiums have a positive relationship with insurers’ sales profitability, its relationship with investment income is a negative one. Also, the results showed that life insurers have been incurring large underwriting losses due to over-trading and price undercutting. The results further revealed a setting-off rather than a complementary relationship between underwriting profit and investment income towards the enhancement of the overall profitability of life insurers.Practical implications - The policy implications of this study for the stakeholders of the life insurance industry are enormous. For instance, insurers must have well resourced actuary departments to perform price validation of all policies in order to prevent over-trading and price undercutting by insurance marketing agents. In addition, the intention of the NIC to adopt a risk-based approach in its supervision is not only timely but a very significant move that will improve upon the accounting and records keeping standards of the industry as well as the governance and risk management structures of the sector.Originality/value - This study fulfills an urgent need of investigating the things that are crucial for the survival, growth and the profitability of life insurers in an emerging economy.

A STUDY ON FACTORS INFLUENCING CLAIMS IN GENERAL INSURANCE BUSINESS IN INDIA

literatinetwork@emeraldinsight.com (T Joji Rao, Krishan K Pandey) — Fri, 17 May 2013 00:00:00 +0100

Abstract

Purpose - The fact that complaints regarding general insurance claims are three times as numerous as those of life insurance claims suggests that claims behaviour of general insurers be investigated to minimize operating losses and ensure operational excellence. Design/methodology/approach - Study of variance and factor analysis has been undertaken to achieve the objective of identifying factors which govern claims in general insurance business. In order to understand the dependency of claims over the sectors and segments, statistical hypothesis testing along with cross tab analysis has been conducted. The study also evaluates the relationship of these factors over the sectors and segments by running a multiple regression.Findings - An empirical result of the study proves that there exists an association between type of sectors i.e. public and private and segments of insurance namely fire, marine and miscellaneous. The study also suggests a claim projection model for the general insurance players. Research limitations/implications - Exclusion of specialized players due to the reason being new entrants and in order to maintain common parlance of sectors may be a limitation to this study.Originality/value - The study recommends that insurance players should not treat the claims settlement strategies in isolation of segments. The claims projection model as suggested in the study may prove to be extremely helpful in projecting the claims and in turn reduce the increasing underwriting losses.