The use of derivatives in general insurance

Document description

A general insurance company both accepts risks and manages them. It does this in ways generally not available to an insured and attempts to produce a profit for providing this service. The difference between profit and loss is small, and an insurance operation could readily be running extensive unplanned risks which could lead to its downfall. Actuaries are playing increasingly active roles in the sound and prudent management of non-life companies. They are well placed to understand enough of other disciplines and broader business issues and hence ensure that the proper measures are taken. This paper is therefore intended to provide actuaries with an overview of the relatively new tools of modern risk management, the derivative instrument, and how it might be used to manage risk in the context of a general insurance company.