Understanding value at risk for insurers

Deborah Cernauskas, Gabriel David and Anthony Tarantino propose an amended approach to value-at-risk that focuses on the drivers of risk and the use of agent-based modelling and simulation to capture the bounded rationality of human decision-making

‘This is unprecedented.’ The phrase is the mantra of risk managers after every major loss or black swan event. Humans have a tendency to believe the next catastrophe will look like those of the past and are continuously surprised when this assumption proves false. This belief has driven risk management techniques for years – preparing for what has happened in the past. Without question, the circumstances surrounding each black swan event are different from those of the past and this catches risk