Investment Risks: Market, Credit and Liquidity Risk

René Doff

This chapter will discuss investment risks, which are also known as financial risks. These risks mostly arise from the investment process of insurers, but some are also due to underwriting activities. The credit risk of reinsurers is one example. An important risk in insurance is interest rate risk, having an impact on both the liability and asset side of the insurers’ balance sheets. We will see in this chapter how asset and liability management takes place to address this risk. This chapter will also address three main investment risks: market risk, credit risk and liquidity risk, including the main sub-risks. As in the previous chapter, we will start by explaining each risk before going into detail on how to control and measure the risk. For each risk, this chapter will explore the relevant economic capital models. Liquidity risk is a special risk type, as will be seen later in this chapter, because economic capital is a less-suitable method for addressing liquidity risk. We will start, however, with market and credit risk.

WHAT IS MARKET RISK?

An insurer invests its technical provisions and its equity capital as part of its primary function as a financial institution. The

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