Risk Budgeting in the Evolution of Insurance Company Risk Management

David Tyson

Insurance companies are the original risk managers. They provide risk-management solutions to their customers and, as a result, have always been focused on the measurement and control of risk. In many ways they have been ahead of some of the risk-management developments in the banking industry, but they have also benefited from the increasing focus on risk management for all financial institutions.

Each insurance company has to be built around its ability to understand and manage the liabilities it underwrites. The actuarial profession has existed for centuries and has always been trained in the techniques that are at the core of risk management. Insurance investment areas developed risk-management practices along with the evolution of quantitative investment management techniques starting in the 1980s. Asset liability management techniques started being introduced when interest-rate volatility picked up in the late 1970s. Most of the development and implementation of risk-management techniques through most of the 1990s was done within the existing insurance management structure. These techniques included simulation analyses, rigorous pricing processes, stress tests, economic capi