Measures of risk

Measures of risk and performance in the management of insurance organisations.

The question of measuring risks and performance is central to an insurance company being properly managed. The aim is to define measures that are representative of the insurance ecosystem using relevant quantitative indicators so that decisions can be made by managerial staff.  These measures and indicators must be adapted to represent risks, create value and performance of the organisation while still being founded on intelligible baselines (especially in terms of validity limits) by their users. Without this, their credibility in effective decision-making would be weak.

In these circumstances, the natural and historical approach is to turn to prescriptive standardised measures, be they legal or economic.  Their advantage is that they are clearly defined and enable comparisons to be made with other players in the marketplace.

Nevertheless, the question of their scope of validity to make decisions appears key. For example, the coverage indicator used by SCR in Solvency II is based on “market-consistent” assessments for placements and actuarial reserves in determining (particularly) the insurer’s initial wealth. Optimisation, to increase this measure of initial wealth, is not necessarily effective in reaching differently expressed targets (e.g. based on financial targets under constraints). In this context, the question of defining measures of risk and performance that represent an insurer’s appetite (for risk), their management goals and their operational implications, appears crucial.

Furthermore, as the principle of consistency with the market is retained both in communication and financial terms (IFRS, MCEV) and prudential rules, the study of its relevance and its scope of validity for decision-making in the insurance sector also appears to be a key subject. Finally, the question concerning the definition and the measure of the insurer’s performance over a given time period, still seems useful at a time when far-reaching changes are being made to the IFRS benchmark for insurers and where the ORSA has to define target measures that can tap into this concept of performance.