Before the opening of our economy to foreign insurance companies in Spain they went through a long period of prosperity and high profit margins. In recent years it has experienced significant narrowing of margins and many of these companies do not really know whether or not to add value when they sell new business.
In this situation, many of these companies have been launched into the world of the "new" management tools, catching on the implementation of, for example, the embedded value or economic value of an insurance company.
For many of them the implementation of embedded value can help "discover" if they have sold in recent years added or no value to the company and can get to correct any wrong policies of prices or can even help redefine a strategy business more in line with the optimization of embedded value or economic value of the entity.
However, targeting only a measure of profitability is insufficient; that is, a company should not only aim to maximize a measure of profitability but must also reshuffle certain risk measures, with the ultimate objective of maximizing the risk-return.
While it is true that insurance companies manage risks from its origins, it is now when it seems that this aspect is gaining greater relevance seeing driven by a series of events among which we highlight the following:
· Recent financial scandals that have occurred (cases like Enron, Worldcom, etc., or even mention some of the sector, the collapse of Equitable Life in the UK), which puts the current system into question report, revealing itself as increasingly necessary greater accounting transparency and better representation of the true and fair view of an entity;
· The rules globally to revolution we are witnessing in the insurance world in the fields of both financial reporting and the solvency. In the first we are talking about the creation of an international accounting rules, which in the industry known as IAS standards and in the second we refer to aimed at quantifying the solvency capital policy development that an insurance company needs to assign your business based on the real risk that this is taking or what is the same, what in the sector in Europe is known as Solvency II.
In line with what has happened in the banking sector (see Table 1) through Basel I (1988), the amendment introduced in 1996 that allows the use of internal models to quantify the capital required to cover market risk, and Basel II whose introduction in the coming years will allow the use of inside information to quantify credit risks and operational, it seems likely that the rule is being developed in solvency II will establish the possibility of calculating the solvency capital of the entity well with formulas more or less conservative or through internal models, which are expected, allow be more precise quantification of necessary economic capital, a company may allocate less capital than through the formula result. What follows is proposed in this paper is a system of risk management based on the latter, ie in quantifying them through internal models without forgetting its relationship with the company strategy and with some measure of profitability or solvency.
In order not to stretch too much the document and with the intention to treat at a reasonable level of each of the risks detail, this article focuses its main attention on two of the risks that have the greatest impact on a company's life insurance : technical and market, leaving for later deliveries treatment other risks.
Strategy and the risk-return
When the Directorate of an insurance company develops a particular corporate strategy should not overlook the desired risk-return relationship.
That is, for example, if a company measures its risk in terms of the probability of default over the next 5 years, placing its "appetite" risk by 5%, if your strategy was the development of a new business line include a significant increase in high-risk products / high profitability that will result in a probability of default of 10%, need, somehow, readjust its strategy to allow you to lower the risk taken either seek sources of funding / assign further to this line of business capital to risk level is maintained within the desired limits.
In addition, the decision on strategy and risk-return level desired is intertwined with specific actions ( "levers") that the company decides to carry out the implementation of this corporate strategy within the desired risk-return framework.
Not all levers in the same way impact on the risk-return target. At the same time, the choice of these levers must be aligned with the corporate strategy of the company: for example, a company bancassurance can focus more on how to maximize synergies with its shareholder (bank / cash) to increase the penetration rate of its customer base while for a traditional company can be more relevant to focus on reducing costs.