Risk Management

René Doff

This chapter describes the fundamentals of this book: what is risk management? We will start by looking at the history of risk, as this will help us achieve a good understanding to discuss the applications in insurance throughout the book. We will then discuss the main frameworks that are used by risk management practitioners across the globe. We will end this chapter by discussing the commonly used risk taxonomy. This taxonomy is also the basis for Solvency II.

WHAT IS RISK?

This is a fundamental question, and the longer we discuss it, the less likely we are to arrive at one conclusive answer. Therefore, we will focus on the way risk is defined in the context of risk management in financial institutions such as insurers and banks. In this context, risk is the deviation of an outcome from its expectation, causing a loss or decrease in value.

Later in this chapter, we will dig into some more aspects of risk, and return to the above definition.

A SHORT HISTORY OF RISK

Although risks have been present at all times during the history of mankind, the explicit attention on them has differed over time. In earlier civilisations, many unexpected events were attributed to gods