ABSTRACT
MARKET RISK is introduced into an insurer’s operations through variations in financialmarkets that cause changes in asset values, products, and portfolio valuation (IAIS, 2004).
Market risks relate to the volatility of the market values of assets and liabilities due to future changes of asset prices (/yields/returns). In this respect, the following should be taken into account:
• Market risk applies to all assets and liabilities
• Market risk must recognize the profit-sharing linkages between the asset CFs and the liability CFs (e.g., liability CFs are based on asset performance)
• Market risk includes the effect of changed policyholder behavior on the liability CFs due to changes in market yields and conditions (IAA, 2004)
The market risk arises from the level or volatility of market prices on assets and liabilities and involves the exposure to movements in financial variables such as interest rates, bond prices, equities (stocks) and property (real estate) prices, and exchange rates. It should include all risks that result from the volatilities in capital market prices.
