Risk is a fundamental business practice and for it to be truly effective, companies must ensure that risk management is embedded within the culture. Insurance companies have been in the business of risk management for hundreds of years. Companies should consider the consistency of risk limits and risk management in their work and decide whether there is any consistency. When consistent set of goals and risk management are in place, the company needs to develop a method to report the risk situation various activities.
At many banks, it is customary for the CEO to get a daily report risk positions throughout the company, in short, a single sheet of paper. Risk can be tied directly to capital allocation. If products are required to hold capital in proportion to their risk, then in accordance with the risk-adjusted returns can be measured. Allocation of funds based on risk adjusted return maximizes return on capital, rather than orienting the company to maximize investment in products with the highest yields that can also have the highest risk. True allocation of capital in proportion to risk can have practical measurement problems, and companies can fall back on using risk-based capital or credit rating formulas. The danger of this is that it creates an opportunity for product managers to arbitrage the actual risk from the simplified formula.
Another big hurdle is to implement modern risk management tools that could provide an accurate picture of compliance risk. Maybe independently measured risk does not have to be together. Low correlations among the various risks managed by life insurance companies have not been widely studied, and it may be another 100 years before enough data can be collected. Just as the risks are and manage the process should be consistent, use risk management tools used constantly sculpt risks of the company to a picture. This should be checked at the risk and expense adjusted basis. Ultimately, risk management is integrated into all operational, financial and strategic decision making.
Risk-adjusted pricing is one of the tools that can be used to achieve this. Random processes generated options are used to develop the projected profits of all products in the statutory definition of pricing. Alternate methods of investing, insuring, pricing and product design can be tested under many cases Stochastic.
Regulation of life insurance with high investment component depends on the objectives of the regulator and the range of products available. Risk for these products can involve the use of sophisticated financial instruments, but the use of these devices can also create risks. Regulators must balance the need for simplicity Regulation to the need to allow for product development.