Insurance Industry Risks

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

Government: Commonwealth, state and government trading enterprises D. Overseas—the rest of the world 6. The risk that impacts specifically on the share price of a particular company is called: A. economic risk B. business risk C. systematic risk D. unsystematic risk 7. When investors buy and sell shares based on receiving new information on shares and markets, this is known as: A. active investment B. a diversified strategy C. a market replication strategy D. passive investment 8. To track the S&P500, a fund manager can buy: A. all the stocks in the S&P500 B. an S&P500 index fund C. a percentage of stocks that essentially tracks the index D. All of the given answers. 9. The correlation of pairs of securities within a portfolio is called: A. co-association B. correspondence C. covariance D. variance 10. The correlation between two shares: A. can take on positive values

Systematic risk or market risk is the risk that affects a large number of assets. Examples of systematic risk are inflation or increasing the interest rate, or any uncertainties in the economy but not the company 's performance. Unsystematic risk is the risk that mainly associated with specific companies or may be some competitors and suppliers. The systematic risk affects the whole market and cannot be controlled by investors. Unsystematic risk however affects the company and is controlled by the company 's performance. When investors invest money into a company they must research all aspects of that company so they are aware of the unsystematic risks they may encounter.

Systematic risk results from factors that affect all stocks. The risk of a project from the viewpoint of a well-diversified shareholder. This measure takes into account that some of the project’s risk will be diversified away as the project is combined with the firm’s other projects, and, in addition, some of the remaining risk will be diversified away by shareholders as they combine this stock with other stocks in their portfolios.” (Keown PG, 510)

In order for a company to establish the correct balance between their risk-retention and risk-transfer they must first complete a risk-retention analysis. This analysis allows an organization to establish their maximum level of risk retention. This is accomplished through a combination of the traditional analysis of principles based on investment and decision, along with pricing according to the insurance industry. The results of this analysis show the cost-effectiveness and trade-off of savings on premiums versus the increased risk of a higher retention level. Now that the company has successfully established the basic parameters of being self-insured ,with assistance from their actuary, "an individual that specializes in the measurement and management of risk"(www.soa.org) and their commercial insurance broker; the most cost-effective type of risk retention must be established. Commercial insurance companies often dictate clients that are self-insured as to what type of risk-retention the company will assume. This occurs because once the self-insured clients maximum limits have been reached it is at this point the commercial insurance company assumes responsibility for any remaining amount of a claim. There are several types of strategies of risk-retention that companies can assume when self-insured that fall within the established boundaries of the commercial insurance market. Each self-insured company has its own unique risk-retention capacity specific to their

Insurance is a type of protection against possible financial loss. There are many different type of insurances and each has its’ own purpose. Most people invest a large sum of money investing in home and vehicle coverage. Therefore with such a large investment used to protect items from loss it is extremely important. After research according to (Kapoor 2010), “each year homeowners and renters in the United States lose billions of dollars from more than 3 million burglaries, 500,000 fires and 200,000 cases of damages from other perils” p.256.

The tool that insurance companies use to balance this complex financial equation is their premium. For example, with larger providers, a five million dollar deficit could be remedied by raising every policy holder's auto insurance by a few dollars. Conversely, in a year of good fortune for the company, they could lower their premiums and still show the required profit. Over time, these adjustments can create significant differences between competing insurance companies.

Explain the historical relationships between risk and return for common stock versus corporate bonds. Explain how diversification helps in risk reduction in a portfolio. Support response with actual data and concepts learned in this course.

Like a business, individual faces also investment risk. That is the risk related to the volatility of interest rate when investing, say for example, in the 401k. This risk can be measured by standalone risk, which is the standard deviation of each security. To minimize this risk, individual needs to diversify her or his portfolio by dividing funds among securities or company stock fund and other target retirement fund. Moreover, consider investing in securities with lower interest rate of returns protect your investment from loss because they are less risky.

In general, risk measure should assess the probability, essence, and intensity of a deviation from the expected value of return. Nevertheless, Markowitz portfolio selection theory states that the risk of each asset in isolation is not crucial, but the contribution of each asset to the risk of the portfolio is decisive. In context of a portfolio, the total risk of a security can be divided into two basic components: systematic risk (also known as market risk or common risk) and unsystematic risk (also known as diversifiable risk). Although, since the returns on different assets are correlated to at least some degree, unsystematic risk can never be completely eliminated regardless of how many types of assets are aggregated in a portfolio, it can be significantly diminished by the diversification of securities within a

Risk (also found in the literature, the term total risk) of stockssecurities is the uncertainty of its income at the end of the investment period. Risk is measured by the dispersion of the yield of a security over a fixed time interval, for example, month, quarter, year, and so on. The definition of risk is the most common, although there are others.

In general insurance, Insurers make use of data gathered previously out of experience in order to predict the future liabilities. Such an estimate is made through the help of a “loss function” in decision making, as well as mathematical optimization. It is a common tendency to minimize the loss of the risk models and hence to do so are different methods applicable in today’s statistics. Frequentist expected loss, Bayesian expected loss are mostly used; with Bayesian statistics being the increasingly common methodology in actuarial science. Insurers also make an estimate of the expected claims that arise in the future years, and so they need to hold reserves based on the aggregate claim amount they could face in the near future. Hence one way of doing this is by using the aggregate claim model. Therefore, examining and comparing the different forms of loss distribution that could be used in the aggregate risk model analysis, besides investigating about issues surrounding the application of Bayesian statistics in such a context.

Risk has a role in individual’s lives around the world and that role can be influenced by an individual’s character and their daily life. Risk and return is affected by time when investing occurs. Time relates to the amount of time in the market which offers the highest chance of returns. The investment time frame will determine the amount of impact that investors will see, investment choices includes stocks and bonds (Kinicki, Cornett, Adair, Nofsinger, 2016).

Undiversifiable –This type of risk is commonly known as systematic or market risk. This risk is associated with each and every company. Causes are things like inflation ray, exchange ray, political instability, entrust rate. This type of risk is not specific to a particular company or industry and it cannot be eliminated or reduced through diversification, its just a type of a risk that investors must accept.

 The basis upon which the premium will be calculated in the case of household