Risk Measurement in Insurance: A Guide to Risk Measurement, Capital Allocation and Related Decision Support Issues

Risk measurement provides fundamental support to decision making within the insurance industry. In spite of this, the limitations of the common measures are not well appreciated and there is little non-specialist awareness of the more powerful techniques. The published material on risk measurement is strong and has developed significantly in recent years. However, it is fragmented and is not always in a form that is accessible to many industry practitioners. Also, notwithstanding the theoretical merits or otherwise of different techniques, many practical attempts to measure risk can be compromised by inappropriate use and interpretation. This paper aims to give an accessible overview of the full range of risk measurement and allocation techniques, critiquing both technical properties and practical considerations. A simple example is used throughout the paper to help illustrate the various measures and methods, with values being calculated using stochastic simulation.