Dynamic Risk-taking Strategy on Negatively Correlated Products - A Lesson from COVID-19

COVID-19 has significantly impacted our society and has revealed the gap in coverage that insurers had provided. Insurers are responsible for modifying the products to cover the gap and consequently respond to social needs.

We identify a portfolio such that risk-return efficiency maximizes within the risk appetite in an investment strategy. It is also true of sales strategy. After estimating the total sales volume for the next fiscal year considering the capacity of a company's sales force, we identify a portfolio of products such that risk-return efficiency maximizes within the risk appetite. After determining the optimal portfolio, we sometimes modify the product to include additional risk premiums or sales incentives. Annoying to us, the modification often has a non-linear relationship with the sales volume. Therefore, we perform a lot of trial and error in many cases.

Behaviour change such as staying home and shifting to remote work due to COVID-19 has dramatically decreased injury hospitalization. Consequently, such an unexpected decrease mitigates the impact on infection-related hospitalization payment for life insurers, which produces a negative correlation between products. This paper first discusses the optimal portfolio of negatively correlated products, then proposes a modification that can respond to social needs without an additional cost.

Find the Q&A here: Q&A on 'Understanding Risks in Practice'