Purpose – The purpose of this paper is to explore the roles of diversification, hedging, and a third risk-reduction process – “pacification” – in risk finance. Design/methodology/approach – After briefly reviewing the concepts of diversification and hedging, a simple mathematical...

Purpose – The paper aims to explore a risk-finance context in which less information may be preferable to more information. Design/methodology/approach – Insurance companies collect a variety of information on potential policyholders to support two fundamental components of risk...

Purpose – Definitions of pooling effects in insurance companies may convey the impression that the achieved risk reduction effect will be beneficial for policyholders, since typically lower premiums are paid for the same safety level with an increasing number of insureds, or a higher safety...

Purpose – The paper aims to explore a risk-finance context in which less information may be preferable to more information. Design/methodology/approach – Insurance companies collect a variety of information on potential policyholders to support two fundamental components of risk...

Purpose – The purpose of this paper is to explore the roles of diversification, hedging, and a third risk-reduction process – “pacification” – in risk finance. Design/methodology/approach – After briefly reviewing the concepts of diversification and hedging, a simple mathematical...

Purpose – This editorial, the second of a two-part series, proposes a new measure of risk for analyzing highly non-normal (i.e. asymmetric and long-tailed) random variables in the context of both investment and insurance portfolios. The proposed measure replaces the p-norm-based definition of...

Purpose – In this two-part series, this paper seeks to consider certain intriguing aspects of randomness, the basic mathematical concept used to model financial risk and other unknown quantities in the physical world. Design/methodology/approach – Part 1 applies concepts from quantum physics...

Purpose – The purpose of this paper is to consider the problem of allocating responsibility for risk through a simple classroom vignette that illustrates some of the difficulties encountered in more complex real-world scenarios. Design/methodology/approach – After considering a number of ad...

Purpose – To consider why the law of large numbers does not play a more significant role in determining an insurer's financial leverage. Design/methodology/approach – Insurer-group data show that there is little relationship between an insurer's premium volume and its overall leverage (i.e....

Purpose – Systematic mortality risk, i.e. the risk of unexpected changes in mortality and survival rates, can substantially impact a life insurers' risk and solvency situation. By using the “natural hedge” between life insurance and annuities, insurance companies have an effective tool for...