Learning About Risk: Some Lessons from Insurance

12 Pages Posted: 28 May 1999

See all articles by Hélyette Geman

Hélyette Geman

University of London - Economics, Mathematics and Statistics

Multiple version iconThere are 2 versions of this paper

Abstract

This paper argues that in the fundamental subject of financial risk analysis, some valuable lessons may be drawn from insurance. The probability of ruin, defined as a first passage time, carries a dynamic element whose absence in Value at Risk is one liability, among others. Extreme value theory, which has been successfully applied to insurance shortly after it was introduced in probability, may offer a coherent framework for analyzing the extreme moves such as the ones observed in recent foreign exchange and financial crises. Lastly, we show that the genuine hazards generated by global capital markets and illustrated by the events of summer 1998, generate a market incompleteness that existing models of defaultable bonds do not fully address. In contrast, the long experience of risk premium analysis in the insurance and reinsurance industry, as well as the existence of historical data on natural disasters, render the valuation of catastrophe bonds less perilous than that of defaultable bonds.

JEL Classification: G13, G22

Suggested Citation

Geman, Helyette, Learning About Risk: Some Lessons from Insurance. Available at SSRN: https://ssrn.com/abstract=275835 or http://dx.doi.org/10.2139/ssrn.275835

Helyette Geman (Contact Author)

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
677
Abstract Views
2,475
rank
46,237
PlumX Metrics