Value-oriented risk management of insurance companies. Translated from the German by Patrick D. F. Ion. (Q390783)

The book is devoted to describe the process of value-oriented management for insurance business. The work consists of eight chapters and five appendices. The economic description and analysis of possible risks for insurance companies are presented in the first chapter of the book. There are many ways to classify risks faced by an insurance company. The authors of the book propose to be essential the following kinds of risks: strategic risk, market risk, credit risk, liquidity risk, insurance risk, operational risk, reputation risk and concentration risk. All these risks are fully described, and illustrative examples are presented. The qualitative and quantitative evaluation of risks are discussed. Also there are presented various ways of response to risks, such as: risk avoidance, reduction of risks, risk transfer by using reinsurance in essential. It is very important to identify financial risks with an amount of money which gives an indication of how much one can lose in the event of the risk occurring. For this, various risk measures can be applied. The second chapter of the book is devoted to present a number of risk measures. Measures based on moments, value at risk, tail value at risk and expected shortfall are described together with their main properties with high priority for the coherency of these risk measures. Besides of risk measures for one time period, the authors consider also dynamic risk measures. They generalize the main risk measures for one period to analogous risk measures on filtered product economies. The mathematical background needful for such generalization is presented together with the main properties of dynamic risk measures and examples of numerical calculations. The third section of the book deals with copulas. The authors present definitions for copulas and related concepts, the main properties of copulas and examples of popular copulas such as the Gauss copula, the Gumbel copula and the independence copula. The value of risk measures could be interpreted as risk capital. The chosen risk measure reflects the risk aversion of the company. On can view the risk capital simply as a value to be calculated to compare risks. On the other hand, the risk capital is a capital buffer that is used up in case of need, if a risk actually realized. So risk capital should be available in case of need. The fourth chapter of the book describes cost of capital, risk-bearing capital, all possible types of risk capital, valuation of insurance liabilities and the most popular methods for modelling risk capital. Besides, the authors present a simplified description of the \textit{Swiss Solvency Test} and the standard model in \textit{Solvency II} as examples for a risk capital model that are applied in practice. Chapter 5 deals with the capital allocation problem. The capital allocation problem arises in case we consider \(m\) risky portfolios, whose risks are described by random variables \(X_1,X_2,\ldots, X_m\). The risk of the portfolio as a whole is the sum \(X_1+X_2+\cdots+X_m\). The capital allocation concepts together with the main axioms for the allocation vector are given. A lot of interesting examples of allotment capital allocations are presented. The existence problem is considered of the allotment capital allocation for risk measures with special properties. The management of an insurance company should begin with the performance measurement of the company. In Chapter 6, various kinds of performance measurements are presented. The Economic Value Added (EVA) and related concepts such as the Return on Capital (ROC) and the Return on Risk Adjusted Capital (RORAC) are described. A numerical example is presented to calculate EVA and RORAC for some different business lines. The various procedures are discussed for the valuation of an insurance company. Chapter 7 is devoted to the principal components of value-oriented company management. Strategic component, measurement component, organizational component and process component are described. The process of a value-oriented management is illustrated by considering a fictional insurance business company having three business areas: fire, liability and theft. In the last part of the book the authors examine several regulation mechanisms for insurance companies: KonTraG, Solvency I and Solvency II. As was noted above the book has five appendices. The first appendix deals with the Capital Asset Pricing Model (CAPM), while in the following four appendices the authors present \texttt{R}-codes for various complex calculations needed to solve some problems from the main text. In sum, the presented interesting book is useful for actuaries and for risk managers as well as for students and for researchers studying financial or actuarial mathematics.