The Foreign Exchange Rate Risk: Institutional Issues and Stochastic ModelsMaking of Imminent Insurance Markets in Asia

The increasing globalization of the property-casualty insurance industry has provided insurers with both opportunities and challenges. The opportunities revolve new markets with profit potential and diversification possibilities. On the other hand, companies with multinational operations and/or investments are exposed to the risk that foreign exchange rates will change, possibly adversely, in the future. Tins paper examines the sources of foreign exchange risk, and discusses the institutional techniques - e.g, financial derivatives - available to companies to manage that risk. Some anecdotal evidence is provided to indicate how some insurers actually do manage foreign exchange risk. Finally, the paper briefly describes some possible approaches to the modeling of foreign exchange risk, for example in a dynamic financial analysis context when modeling, the interrelationships between exchange rates and other variables - e.g., interest rates and inflation rates m the relevant countries - must be considered and reflected.