financial risks and their mitigation in insurance industry

7/23/2019 Financial Risks and Their Mitigation in Insurance Industry

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Risks in Insurance

IndustryPresented By:

Junaid Tariq

Zahir Shah

Muhammad Shafay Shahid

Mohsin Iqbal

Mohsin Ibrahim


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Presentation Content Overview of Insurance Industry

Type of Risks Faced

Risk Reduction Models

Conclusions


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Industry Overview1947 Now

77 Insurance Companies 54 Insurance Companies

70 of those 77 companies were

foreign companies or their

branches

Today all 54 companies are with

foreign backing

7 local companies No local company


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Industry Overview Oer primarily Fire, Marine, Motor and Accident cover ome also oer additional services of !n"ineerin", Aviation

# Aerospace

As of $ecem%er &'((, t)e industry*s total premium revenue

stood at over +R(&- %illion ./ non0life insurers operatin" in t)e market, includin" t)ree

"eneral Takaful operators and one state0owned companyo Appro1imately 23 percent of t)e market s)are in "ross written premium

rests wit) t)e top t)ree players

'/ life insurers, includin" two family Takaful operators andone state0owned corporation

T)ere are two dedicated )ealt) insurance companies in t)emarket alon" wit) two forei"n life insurance companies andtwo non0life forei"n companies


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Industry Overview


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Type of Risks Credit Risk

Credit risk is t)e risk t)at arises wit) t)e possi%ility t)at oneparty to a 4nancial instrument will fail to disc)ar"e itso%li"ation and cause t)e ot)er party to incur a 4nancial loss

Liquidity Risk5i6uidity risk is t)e risk t)at t)e Company will not %e a%le to

meet its 4nancial o%li"ations as t)ey fall due7 T)e Company4nances its operations t)rou") e6uity and workin" capitalwit) a view to maintainin" an appropriate mi1 %etweenvarious sources of 4nance to minimi8e risk


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Type of Risks Market Risks

Market risk means t)at t)e fair value or future cas) 9ows ofa 4nancial instrument will 9uctuate %ecause of c)an"es inmarket prices

Market risk is furt)er divided into:

o Interest ; mark 0 up rate risk

o +rice risk

o Currency risk

o Insurance risk


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Type of Riskso Interest mark ! u" rate risk

Risk t)at t)e value of a 4nancial instrument or future cas)9ows of a 4nancial instrument will 9uctuate due to c)an"esin t)e market interest ; mark 0 up rates

Pri#e riskRisk t)at t)e fair value of 4nancial instruments will

9uctuate %ecause of c)an"es in t)e market prices


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Type of Risks Curren#y risk

Currency risk is t)e risk t)at t)e fair value of future cas)9ows of a 4nancial instrument will 9uctuate %ecause ofc)an"es in forei"n e1c)an"e rates

Insuran#e riskT)e principal risk t)at t)e Company faces under insurance

contracts is t)at t)e actual claims and %ene4t payments ort)e timin" t)ereof may dier from e1pectations


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Risk Models$istori#al Simulation

A list of pro4ts and losses

Current portfolio would )ave %een )eld over prede4ned)istorical time

(> ?alue0at0Risk is determined %y c)oosin" t)e ( > worstloss

!asy to understand, %ut it )as certain draw%ackso @istorical pat)s of market movements

o Time consumin" to recalculate t)e market value


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Risk ModelsThe %arian#e!Co&arian#e Method

Measures t)e standard deviations


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Risk Models'#onomi# Ca"ital Model T)e amount of capital an or"ani8ation re6uires to survive or

to meet a %usiness o%ective

Assess capital ade6uacy and develop risk strate"ies

Ro%ust capital model can "enerate key metrics for strate"iccapital and risk decisions for t)e or"ani8ation

Involves several factors:o @istorical data

o +rices in t)e marketplace

o Dature, scale and comple1ity of t)e risks faced %y t)e or"ani8ationo Appropriateness of t)e selected time frame

o Easis of measurin" loss


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Risk ModelsMarket!Consistent 'mbedded %alue Model !nterprise credit wort) for insurance

MC!? AD G +?F+ H T?FO H FCRC H CRD@R

()*


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CONCLUSION

financial risks and their mitigation in insurance industry

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