Risk encyclopaedia

If an insurer sets a premium based on the average probability of a loss in an entire population, those at higher-than-average risk for a certain hazard will benefit most from coverage, and hence will be the most likely to purchase insurance for that hazard

Adverse selection

If an insurer sets a premium based on the average probability of a loss in an entire population, those at higher-than-average risk for a certain hazard will benefit most from coverage, and hence will be the most likely to purchase insurance for that hazard

In an extreme case, the poor risks will be the only purchasers of coverage, and the insurer can expect to lose money on each policy sold. This situation, referred to as adverse selection, occurs when the insurer cannot distinguish between members of good-...

Basic concepts of insurance

From losses and claims to the law of large numbers, you’ll find everything you need to know about insurance in this basic guide

Insurance is an economic institution that allows the transfer of financial risk from an individual to a pooled group of risks by means of a two-party contract. The insured party obtains a specified amount of coverage against an uncertain event for a sma...

Precautionary principles

Precautionary principles state that when there are threats to the environment, scientific uncertainty should not prevent prudent actions to prevent potentially large damage

In order to protect the environment the Precautionary Approach is widely applied: fundamentally, where there are potentially grave or irreversible threats, lack of full scientific certainty shall not be used as a reason for postponing cost-effective...

Correlated risks

Correlated risks from natural disasters

Correlated risk refers to the simultaneous occurrence of many losses from a single event. Natural disasters such as earthquakes, floods, and hurricanes produce highly correlated losses: many homes in the affected area are damaged and destroyed...

Default risk

Default risk is the probability of default and helps potential lenders determine whether they should issue loans

The assessment of default risk is also critical in the valuation of corporate bonds and credit derivatives such as basket-default swaps. There is an important distinction between default risk under the actual probability measure and that under the risk-ne...

Scenario simulation methods

In financial risk management, two types of risk measurements are commonly used

The first type measures the sensitivities of portfolio value to some particular market variables. Usually, a portfolio’s risk profile can be described by a large number of those sensitivities. The second type is more comprehensive as it ...

Science of uncertainty

The public is increasingly alarmed over effects stemming from toxicants and industrial waste

Mismanagement of past environmental risk issues, by both scientists and policy makers have left the public distrustful. When risk controversies arise, a struggle may result between competing interests. The typical response from scientists and industry dur...

Credit value at risk

According to Jorion, banks allocate roughly 60 percent of their regulatory capital to credit risks, 15 percent to market risks, and 25 percent to operational risks

Consider a credit portfolio that consists of default-sensitive instru¬ments such as lines of credit, corporate bonds, and government bonds. The corresponding credit value-at-risk (VaR), is the minimum loss of next year if the worst 0.03 percent event ...

Alternative assets

Alternative asset categories have become popular with investors since the 2000–2001 recession

Until the 2008-2009 crash, leading University endowments and other institutional investors have achieved superior returns over the past decade by shifting a sizeable proportion of their capital to private investments. Over this period, numerous pension t...

Basel II to Solvency II

Without a sound risk allocation system, risk-related decisions are likely to be suboptimal and lead to higher volatility, following unanticipated negative events, and less investment.

  The rules for banking supervision at the Bank of International Settlement (BIS) in Basel have changed business in all OECD countries. Basel I was launched in 1988. The justification of a framework is based on the interdependence of banks and...

Securitisation/life

Securitisation is the isolation of a pool of assets and the repackaging of those assets for trading in capital markets. Securitisation began in the 1970s with US banks selling off pools of mortgage-backed loans

Securitisation is the isolation of a pool of assets and the repackaging of those assets for trading in capital markets. Securitisation began in the 1970s with US banks selling off pools of mortgage-backed loans. By 2002, some $450bn of assets had been sec...

Dynamic Financial Analysis

Dynamic financial analysis (DFA) is an application of mathematical modelling to businesses. DFA models the key elements that impact an organisation’s operations and simulates thousands of potential situations, determining the firm’s financial condition for each outcome.

Dynamic financial analysis (DFA) is an application of mathematical modelling to businesses. DFA models the key elements that impact an organisation’s operations and simulates thousands of potential situations, determining the firm’s ...

Enterprise Risk Management

Enterprise risk management (ERM) is a recent technique, practiced increasingly by large corporations in industries throughout the world.

Enterprise risk management (ERM) is a recent technique, practiced increasingly by large corporations in industries throughout the world. Sensible risk management flows from the recognition that a dollar spent on managing risk is a dollar cost to the...

Consumer products

Each year consumer products are involved in millions of injuries and thousands of fatalities. Responsibility for this rests with the manufacturers

Each year consumer products are involved in millions of injuries and thousands of fatalities. Responsibility for this rests with the manufacturers. Most developed countries have also established government agencies that provide regulatory oversight. In th...

Actuary

The word actuary derives from the Latin actuarius, who was the business manager of the Senate of Ancient Rome. It was applied to a mathematician of an insurance company in 1775 in the Equitable Life Insurance Society of London.

The word actuary derives from the Latin actuarius, who was the business manager of the Senate of Ancient Rome. It was applied to a mathematician of an insurance company in 1775 in the Equitable Life Insurance Society of London. Actuarial science This prov...

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