Preface

Companies face risks every day, they are part of normal business life. There are many risks — both threats and opportunities — which may impact on a company's resources, projects and profitability. Risk means different things to different businesses and organizations. Undoubtedly, the risk represents both a potential threat and potential opportunity for businesses.

Every business and decision involves a certain amount of risk. Risk might cause a loss to a company. This does not mean, however, that businesses cannot take risks. As disengagement and risk aversion may result in missed business opportunities, which will lead to slower growth and reduced prosperity of a company. In today's increasingly complex and diverse environment, it is crucial to find the right balance between **risk aversion and risk taking**. To do this it is essential to understand the complex, out of the whole range of economic, technical, operational, environmental and social risks associated with the company's activities. However, risk management is about much more than merely avoiding or successfully deriving benefit from opportunities. Risk management is the identification, assessment, and prioritization of risks. Lastly, risk management helps a company to handle the risks associated with a rapidly changing business environment. When risk management does receive attention, it is often in response to unforeseen (and usually negative) events.

The impact of the global economic crisis has varied from one country to another: not all countries, sectors and organizations were affected in the same hard way by it. Even, the impact of the financial crisis is varying widely across companies within the same sector. In today's post-crisis economy effective risk management is a critical component of any successful management strategy. In complex and rapidly changing situations, as today's supply chains and partnership arrangements tend to be, management needs to consider all risks within the enlarged business connections.

Understanding of the risk management is vital for both practitioners and researchers. The emergence of new insights into approaches and models can help address multifaceted risk management issues.

There are five parts in this book of 23 chapters. The papers are organized according to theoretical, methodological and practical issues and areas of risk management: Part 1

#### XIV Preface

provides new insights into theoretical approaches and models for risk management, Part 2 deals with risk and supply chain management, Part 3 focuses on specific aspects of enterprise risk management, Part 4 examines risk management practice across different projects and industries, and Part 5 discusses emerging issues related to climate change and climate risk management. The authors touched on a wide range of risk management issues. Consequently, in the context of the thematic classification scheme, some papers fall into more than one category.

I consider it an honour and privilege to have had the opportunity to edit this book. I am particularly grateful to all the authors for their outstanding contributions, and to Mirna Cvijic, the publishing process manager at InTech, for her kind assistance in publishing this book.

#### **Dr. Nerija Banaitiene**

Department of Construction Economics and Property Management, Faculty of Civil Engineering, Vilnius Gediminas Technical University, Lithuania

**Approaches and Models for Risk Management** 

**Chapter 1** 

© 2012 Hürlimann, licensee InTech. This is an open access chapter distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

© 2012 Hürlimann, licensee InTech. This is a paper distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

**Biometric Solvency Risk for Portfolios of General** 

The main theoretical goal of the present exposé is to extend the results presented in Hürlimann [1] to the Markov chain model of life insurance, which enables modeling all single life/multiple life traditional contracts subject to biometric risk with multiple causes of decrement. In particular, a complete risk modeling of single-life insurance products with mortality and disability risks requires the specification of a Markov model with three states. As novel illustration we offer to the interested practitioner an in-depth treatment of

The present investigation is restricted to biometric risks encountered in traditional insurance contracts within a discrete time Markov chain model. The current standard requirements for the Solvency II life risk module have been specified in QIS5 [2], pp.147-163. QIS5 prescribes a solvency capital requirement (SCR), which only depends on the time of valuation (=time at which solvency is ascertained) but not on the portfolio size (=number of policies). It accounts explicitly for the uncertainty in both trends (=systematic risk) and parameters (=parameter risk) but not for the random fluctuations around frequency and severity of claims (=process risk). In fact, the process risk has been disregarded as not significant enough, and, in order to simplify the standard formula, it has been included in the systematic/parameter risk component. For the purpose of internal models and improved risk management, it appears important to capture separately or simultaneously all risk components of biometric risks. A

As starting point, we recall in Section 2 the general solvency rule for the prospective liability risk derived in [1], Section 2, which has resulted in two simple liability VaR & CVaR target capital requirements. In both stochastic models, the target capital can be decomposed into a solvency capital component (liability risk of the current period) and a risk margin component (liability risk of future periods), where the latter must be included (besides the

**Life Contracts (II) The Markov Chain Approach** 

Werner Hürlimann

**1. Introduction** 

http://dx.doi.org/10.5772/48374

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more detailed account of our contribution follows.
