2012 Reports

Built-in Stabilizers and Risk Literacy: Protecting the Sustainability of the Insurance Industry

Goto, Shigeyuki

Just as any chain is only as strong as its weakest link, any sophisticated, cutting edge assessment is only as good as the robustness of the underlying assumptions. This is increasingly true for tail-risks, where even the most advanced predictions and modelled outputs are not immune from judgement errors and/or statistical uncertainty. On the part of insurers, this warrants better pooling of risks by way of creation a better diversified portfolio and the building up of capital buffers for unforeseen/unpredicted events. In this paper, I wish to touch on two approaches to achieve the above; the first is to have built-in stabilizers in place in the form of special systems and/or schemes; the second is to raise awareness of and have in place processes that address psychological biases behind the various assumptions and analysis we use in our day to day operations.