Assessment of Risk Function Using Analytical Network Process

Abstract

The concept of this paper is to perform theimprovement of the risk function analysis, assessment and management with theaim to ensure a more sensitive and sophisticated risk coverage in accordancewith the Solvency II regime requirements. The authors have offered an approachof risk function implementation and management corresponding with the SolvencyII framework by integrating the Analytic Network Process into decision-makingprocess of an insurance company. The Analytic Network Process is thecombination of SWOT analysis designed to evaluate an insurance company’sactivity and the choice of strategy with the purpose to ensure its furthersuccessful development and financial stability. The Analytical Network Processcan be used also in banking, investment field and other non-financialindustries. The Analytic Network Process allows measuring the dependencies andfeedbacks among decision elements and strategic factors in the hierarchical ornon-hierarchical structures; thus, it might be used within the analysis ofcomplicated and sensitive interrelationships between decision levels andattributes. The most valuable advantage of using the Analytic Network Processin insurance is the possibility to include tangible and intangible strategicfactors and elements into the decision-making process of an insurance companyby applying specified functions or fields steering, analysis and management.Moreover, the authors have prepared the case study about the practical usage ofthe Analytic Network Process through the example of one non-life insurancecompany. In the case study, the authors have emphasized the most preferablestrategy through a detailed analysis of risk function by using the AnalyticNetwork Process. According to the authors, the Analytic Network Process isconsidered to be part of the risk culture of an insurance company, since ithelps to increase the employees’ knowledge of risk nature and its influence onthe development and results of an insurance company. In order to achieve thestated objective, the authors use theoretical and methodological analysis ofthe scientific literature, as well as analytical, comparative, mathematical andstatistical methods with the purpose to study the elements of an insurancecompany’s risk function evaluation.DOI: http://dx.doi.org/10.5755/j01.ee.26.3.8736