The Canadian Institute of Actuaries has published a new resource for actuaries, risk practitioners, risk managers and executives who are entering a risk management role or who are seeking to broaden their knowledge of risk diversification.
The document, entitled Risk Diversification, addresses risk diversification as it relates to areas of life and health insurance, property and casualty insurance, mortgage insurance and pensions, specifically for the benefit of those working in actuarial practice.
The report covers risk diversification concepts, regulatory perspectives on risk and how to measure risk diversification. “Risks diversification, or the concept of spreading risks, forms the foundation of insurance and is the keystone on which important risk management processes ultimately rely,” they write, before defining risk, examining diversification’s benefits and discussing correlation. The report also provides simple examples to illustrate benefits. “Generally there is a high correlation between financial risks (credit and market) and low correlation between insurance and credit risks, as there are different factors driving the risks,” they add.
Sections also address business risks, strategic risks, insurance and pension experience risk, market risk, credit risk, liquidity risk and operational risk. The responses examined include to accept the risk, avoid it, mitigate it or transfer and share the risk. The report also looks at the application of risk diversification in mergers and acquisitions, new business growth, capital allocation exercises and in pricing and in underwriting.