Financial Economics of Insurance
Financial Economics of Insurance
Introduction
Risk Management
Financial Economics of Insurance
Underwriting Risks: Life Risk and Non-life Risk
Investment Risks: Market, Credit and Liquidity Risk
Non-financial Risks: Operational and Business Risk
The Financial Crisis: Consequences for Insurers
Insurance Supervision: From Solvency I to Solvency II
Insurance Supervision Outside the EU
Pillar I of Solvency II
Pillar II of Solvency II
Pillar III of Solvency II
Accounting Regulations
Banking Supervision: From Basel I to III
Management Control
Organising Risk Management
Bringing All the Strands Together
This chapter will describe the financial functioning of the insurer as a financial institution. Equity capital has a special role within financial institutions, and thus also within insurance companies; therein, risks and risk management have a central position. Insurance supervision will also be discussed later in the chapter.
WHAT IS AN INSURER?
The insurer is a financial institution. The key product of the insurer is the promise to make financial compensation at some moment in the future, depending on the type of product. The fact that the products of financial institutions are not tangible (they do not “manufacture” anything) has resulted in their becoming the subject of academic discussion. Why do insurers actually exist? The reason why an individual needs insurance is obvious: they obtain security and are covered for certain risks – such as their house burning down. Even if there is only a small probability, an individual might not have the financial means to reconstruct the house all over again; therefore, they need to cover that risk.
Insurers pool those risks together in a portfolio. They can do this much more efficiently than individuals because they have the
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