Risk Management and its Impact on Insurance Underwriting Process

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ACKNOWLEDGEMENT

I would first like to express my gratitude for my research supervisor, colleagues, peers and family whose immense and constant support has been a source of continuous guidance and inspiration.

DECLARATION

I [type your full first names & surname here], declare that the following dissertation/thesis and its entire content has been an individual, unaided effort and has not been submitted or published before. Furthermore, it reflects my opinion and take on the topic and is does not represent the opinion of the University.

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ABSTRACT

The financial industry is undergoing phase of change. Risk management plays an important role.' The concept of Economic Capital has become the risk management standard in banking. For banks, the Basel II proposals have been an impetus to implement economic capital in their risk management practice.' Within insurance firms, however, the application of economic capital has been lagging behind. The first chapter introduces the topic, followed by the literature review in the second chapter. The third chapter covers the methodology meanwhile the analysis and discussion of findings are presented in the fourth chapter. The fifth chapter concludes the dissertation with recommendations and implications for future research.



TABLE OF CONTENTS

ACKNOWLEDGEMENTI

DECLARATIONII

ABSTRACTIII

CHAPTER 1: INTRODUCTION1

Background of the Study1

Rationale1

Purpose of the Study3

Aims and Objectives5

Primary5

Secondary5

Main Research Questions6

Sub-Research Questions6

Scope of the Study7

CHAPTER 2: LITERATURE REVIEW8

Risk Management: An Overview9

How to Measure Risk?11

Risk analysis: Methods of Evaluation11

Risks affecting the Organisation12

Risk Management Evolution13

The Risk in the Industry and Management14

Risk Management Process in Organisation15

British Standard ISO31000 Framework16

The Concept of Insurance17

Insurance Origins19

Insurance Organisations20

Underwriting21

ERM: Enterprise Risk Management22

Conceptual understanding on ERM23

How to successfully implement the concept of ERM?24

CHAPTER 3: METHODOLOGY26

Research Approach26

Research Design28

Literature Search30

CHAPTER 4: ANALYSIS AND DISCUSSION31

Risk Measurement31

Market Risk Management and ALM31

Credit Risk Management33

Underwriting33

Premium Risk34

Catastrophe Risk35

Total Non-Life Underwriting Risk35

Current European Regulation and Supervision36

Developments and Initiatives in Insurance Supervision37

Investment Risks and ALM38

Market Risk Calculations39

Credit Risk Calculations39

Total Economic Capital and Performance Measures40

Total Economic Capital40

Underwriting Centre Performance41

Investment Centre Performance41

The Insurance Firm as a Whole42

Solvency position42

Economic Capital Models in Practice: Evidence from the Industry45

CHAPTER 5: CONCLUSION48

Summary48

Limitations of the Research50

Consequences for Management Control52

Conclusion54

Recommendations for Further Research55

REFERENCES57

APPENDIX - A68

CHAPTER 1: INTRODUCTION

Background of the Study

Risk exists at heart of all endeavours whether it is day to day human life or business world. Families and individuals deal with risks daily with the assistant of businesses in this process. Businesses who handle their risks effectively manage to succeed their goals. In today's world everyone continue their mission to reduce uncertainty and gain high level of security.

Vulnerability lies in all businesses for instance, damage or destruction to its property, losing valuable employees, consequences of natural disasters, and other internal or external operation risks. With the growing development and expanding of business throughout the world and increasing services offered today, the businesses in recent times are exposed to more new risks than ever (Skipper & Kwon, 2007).

The true application of risk management practice challenges the exposed risks effectively. Technological and scientific advancement has provided support in managing these risks. Most of the modern risks are handled on national level while in some cases on international ...