Identification and assessment of the risks

• Underwriting risk:
  this is the term used to point out the fundamental risk associated with the insurance business, ie that the actual cost of claims arising from contracts will differ from the amounts expected when the contracts were priced and entered into. This risk is further divided into sub-classes (for example, in life insurance, the components of the mortality risk may be volatility, catastrophe, trend uncertainty, and level uncertainty and other components of the underwriting risk could be lapse risk, expense risk and others).
• Market risk:
  this includes interest rate risk, equity and property risk, currency risk, reinvestment risk, concentration risk, asset/liability mismatch risk, etc.
• Credit risk:
  this includes direct default risk, downgrade risk, settlement risk, sovereign risk, concentration risk, counterparty risk (including from the reinsurer), etc.
• Operational risk
  is the risk related to internal failures including management incompetence, misspelling, fraud criminal intentions and errors in systems and processes.

The exercise of identification and analysis of the particular risks faced by an insurer includes determining the features of that risk for the insurer, documenting and quantifying these risks. This exercise should be regularly repeated, ideally on a continuous basis, and a connection should be established between the risk assessment and a capital requirement valued by the insurer himself. This is one of the objectives of the so-called ORSA (Own Risk and Solvency Assessment) procedure introduced by Solvency II.

The knowledge accumulated in this way will of course also serve for the development of the internal model, for which it will have to be decided if, how and to which extent each risk will be incorporated in the model.