Managing a portfolio of risks

Basic ideas concerning risk pooling and risk transfer, presented in Chap. 1, are progressed further in the present Chapter, mainly with the following purposes:

1. to discuss key features of premium calculation when non-homogeneous portfolios are concerned, namely portfolios consisting of risks with various claim probabilities;

2. to analyze, more deeply, the riskiness of a portfolio and the tools which can be used to face potential losses, in particular introducing the role of the shareholders’ capital;

3. to illustrate the possibility, for an insurance company, to transfer, in its turn, risk of losses to another insurer, namely the possibility to resort to reinsurance;

4. to address dynamic aspects of the management of insurance portfolios.

As we will see, the actions undertaken by an insurer in order to deal with potential losses (see points 1 and 3 above) constitute important examples of risk management actions, in the specific framework of

insurance risk management

.