Insurance Risk

For effective insurance business it is crucial to get deep into performance and profitability details in order to monitor business trends, optimise products pricing, and identify profitable or non-profitable segments. In other words, for insurance business it is critical to ensure the efficient management of insurance risk.


Insurance risk is the main risk for insurance companies under the quantitative impact studies in Solvency II project (accounts more than 90% solvency capital requirements). This risk arises directly from the insurance contracts.


Finance Engineering Insurance Risk relays on Solvency II insurance risks definition, is based on UK risk management standard, which is developed by major risk management organizations in UK - Institute of Risk Management (IRM), Association of Insurance and Risk Managers (AIRMIC) and National Forum for Risk Management in the Public Sector (ALARM). Finance Engineering Insurance Risk combines following management and technological concepts:

  • RBP (Risk Based Pricing)
  • DWH (Data Warehousing)
  • Ad-hoc reporting (enables non IT users to create reports by themselves operating with predefined list of indicators and slices)


Key benefits of Insurance Risk system:

  • Improvement of product profitability
  • Aligned and controlled combination of two targets: profitability and written premium 
  • Better structure of the insurance contract portfolio (ensured opportunities to decrease loss ratio and efficiently spread risks)
  • Flexible features to avoid anti-selection and gain competitive advantages
  • Measured decisions on pricing using price elasticity analysis 
  • More accurate estimation of claim reserves
  • Measured arguments for negotiations with reinsurers
  • Core background for implementation of Solvency II
  • Risk-underwriters, actuaries work according predefined process, which has clear measurement of results and efficient control functions


Investigate more about risk management process and ways how Insurance Risk system supports it.
Investigate more why it is extremely important to invest in elimination of risks anti-selection.
See examples how efficiently distributed risk may help to decrease claim ratio.
See premium elasticity analysis sample result.


Finance Engineering Insurance Risk system offers the following modules:


About process

Simplified approach, suggested by UK risk management standard, offers following repeating steps.



Anti-selection of bad risks is a prevention mechanism, which enables insurance company to sign more profitable policies comparing with competitors. Anti-selection is ensured through detailed and weighted tariff system. The best effect typically is gained for non-commercial product lines.


Risk distribution

Picture below illustrates the impact on efficient spread of risks. Decreased / increased sales volume or decreased / increased claim ratio in particular segment, however redistribution of risk results in savings for overall portfolio.


Price elasticity

Premium elasticity analysis shows expected renewal or quotation to policy ratios in dependency to change in price. Premium elasticity depends on product, market environment, season, and customer types. That’s why it is quite complicated task to develop curves as shown in the picture below. However, with some research and calibration of mathematical models it is possible to gain powerful tool, which helps to predict sales volume upon changes in tariff system.


Reserves module

Critical factors in order to have precise claim reserves estimated:

  • Optimal prediction model / models are used;
  • Prediction in risk based segments (not overall portfolio);
  • Fast preparation of data and execution of models ensured for both: official reserving and testing models to check improvement ideas;
  • Regularly performed back-testing to check the validity of the assumptions.

Price module

Critical factors in order to have efficient and flexible pricing system:

  • Risk based pricing implemented using worldwide known models. Ensured fast recalculation of risk based pricing system.
  • Implemented efficient tool to analyse potential price attributes – prevents anti-selection.
  • Price elasticity and market capacity analysis is available.
  • Company has a fast way to identify significant changes in pricing of other companies in market.

Reports module

Insurance Risk Reports module offers both: identification of threats and opportunities, as well as further control of changes. Module background is ad-hoc reporting concept (enables non IT users to create reports on their own, within predefined list of indicators and slices). That’s why Insurance Risk Reports module will provide fast answer about profitability of policies within any interested segment (or policies related to any particular person) and will support by monitoring claim development.