Economic turmoil taxes market risk models

Managing market risk is a key issue for life insurers. Clive Davidson looks at the challenges they face in modelling this risk and how the assumptions that underpin their models are changing in response to the recent economic turmoil

For many insurers, particularly those in the life business, market risk is the biggest risk they face. But it is also the risk that companies can have the most control over through hedging with derivatives or changes in investment strategy. However, before market risk can be managed it must first be modelled – and therein lies the challenge.

As the past few years have amply demonstrated, markets have a way of behaving contrary to assumptions that necessarily must be made in the modelling process