?PMV;ÅVIVKQIT;KWV\ZIK\[;IZM;_MTT;UWLMTML;;Q\;Q[;XW[[QJTM;\W;
calculate how a change in a market risk factor affects the val-
]M;WN ;IVa;ÅVIVKQIT;KWV\ZIK\;;I[;QTT][\ZI\ML;QV;.QO]ZM;;;JMTW_;;;
What is true for a single contract also holds for a portfolio of
contracts — or even for the balance sheet of a bank.
=`^li\;( 1;DXib\k;I`jbj;Xe[;=`eXeZ`Xc;:fekiXZkj
*OUFSFTU 3BUFT
'PSFJHO
&YDIBOHF
4UPDL
.BSLFUT
$PNNPEJUJFT
'JOBODJBM
$POUSBDUT
;;;
In reality, however, contracts’ rules are not always adhered
\W;;_PQKP;OQ^M[;ZQ[M;\W;KZMLQ\;ZQ[S;;I[;[PW_V;QV;.QO]ZM;;;;1V;\PQ[;
diagram (see below), market risk factors are subsumed into a
single category. Credit risk is determined by counterparties
and their capability to repay obligations (including collaterals,
ratings and probabilities of default), all of which affect ex-
XMK\ML;KI[P;AEW_[;;5IZSM\;ZQ[S;IVITa[Q[;U][\;PI^M;XZMKMLMVKM;
over credit risk, since it is not possible to model the expected
TW[[;WV;KI[P;AEW_[;WZ;I;KWV\ZIK\;_Q\PW]\;ÅZ[\;KITK]TI\QVO;\PM[M;
KI[P;AEW_[;QV;\PM;IJ[MVKM;WN ;KZMLQ\;ZQ[S;;
=`^li\;) 1;DXib\k;Xe[;:i\[`k;I`jb
.BSLFU
3JTL
$SFEJU
3JTL
'JOBODJBM
$POUSBDUT
;;;
Insurance Risk
Although the “natural” order of Basel II would dictate otherwise, it is insurance risk that logically follows as the next risk
category. Insurance risk is generally split into life and non-life
subcategories.; A life insurance policy or contract is — ignoring the probability of death during the coverage period — a
TQM[;QV;\PM;[QOVQÅKIV\;XMVIT\QM[;\PI\;QV[]ZMZ[;KIV;QUXW[M;_PMV;
premium payments are not met. This makes life insurance
contracts practically non-callable, and, consequently, surrender rates are low.
.ZWU; IV; IVITa\QKIT; XMZ[XMK\Q^M;; I; TQNM; QV[]ZIVKM; XWTQKa; Q[;
\PMZMNWZM; I; X]ZM; ÅVIVKQIT; KWV\ZIK\;; IVL; KIV; JM; \ZMI\ML; I[;
such. The only real difference is the coverage of mortality
during the term of the policy. Mortality is taken into account
QV;\PM;\MZU[;WN ;\PM;X W TQKa;IVL;¸;OQ^MV;\PI\;L WM[;VW\;AE]K\]I\M;
in an unforeseen magnitude — it is not even a risk factor. In
ZMITQ\a;;\PM;AE]K\]I\QWV[;IZM;[UITT;;IVL;UWZ\ITQ\a;ZQ[S;\PMZMNWZM;
occupies only a minor spot in the risk spectrum.
6WV;TQNM;QV[]ZIVKM;Q[;UWZM;LQNÅK]T\;\W;PIVLTM;;[QVKM;VMQ\PMZ;
the probability of loss events (frequency) nor their magnitude
(severity) or payoff patterns (loss triangles) can be modeled to
the same precision as in the life insurance case. That said, estimates for these distributions based on historical data do exist
IVL;NWZU;\PM;QVX]\;\W;\PM;ZQ[S;IVITa[Q[;;I[;[PW_V;QV;.QO]ZM;;;;
below).
=`^li\;* 1;Efe$C`]\;@ejliXeZ\;I`jb;
'SFRVFODZ
4FWFSJUZ
-PTT
5SJBOHMFT
*OTVSBODF
$POUSBDUT
;;;
The non-saving part of life insurance can be viewed as a
special case of non-life insurance where the frequency is relatively stable and well studied (mortality tables), and the sever-
Q\a;IVL; TW[[;\ZQIVOTM[;IZM;_MTT;LMÅVML;;NWZ;M`IUXTM;;XIa WNN ;I\;
death). It should be noted that these risk factors apply only to
the liability part of insurance business. The investment or asset side of the business is no different than that of banks, and
is exposed to the same market and credit risks.
Operational Risk
Operational risk (OR) gained in importance under Basel
II, which requires banks to quantify it and set aside capital to cover unexpected losses arising from it. In parallel,
