Assessment of Financial Risks in the Insurance Sector Using the Sensitivity Analysis

Abstract

Companies in the modern dynamic market environment must undergo various types of risks. The importance of each type of risk is different for each specific company depending on the nature of its business, the regional scope, markets of operation, corporate organizational structure, etc. The risk management function within the company is carried out in respect of financial risks, operational risks and legal risks. Financial risk comprises market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The primary objectives of the financial risk management function are to establish risk limits and then ensure that exposure to risks stays within these limits. In the insurance sector, the risk management programme is focused on the unpredictability of situations in the financial markets and seeks to minimize any potential adverse effect on the financial results of insurance companies. The contribution illustrates and explains one of the most common and simplest methods of the risk assessment, the sensitivity analysis, in a practical example using the Slovak insurance company.