Some insurers and reinsurers accept volatility as part and parcel of the business they are in, provided the long-term results are favourable. Other companies, by contrast, see consistent profit growth as a top corporate priority.
To achieve profit stability requires a diversified strategy that understands not only the different types of risk inherent in the business, but also the way they inter-relate. The World Trade Centre attack was an extreme example of a phenomenon known as “long-tail dependency”. To put this simply, it means that, if one area of the business goes badly wrong, then there is a greater probability that others may too. The WTC disaster affected most lines of insurance and reinsurance, including Life, and investments too.
Financial modeling is an essential element in planning for profit stability as it provides an understanding of the variability and inter-dependence of different risks in the business.
