Abstract of Meeting Paper

Society for Risk Analysis - Europe 1998 Annual Meeting

Risk Analysis Methods for Insurance Strategy: Transition Economies. Dr. Naum Borodyanskiy, Secretary Kiev - SRA Chapter, Head International Relations Department, International Solomon University, Ukraine, Kiev 252032 , Saksaganskogo 112 , 4, telephone/fax 00 380 44 2243026

A significant part of the European territory is in stage of dramatic economic transmission. The new market economies in Europe are facing growing demand for financial services, especially for insurance. The main aim of this article is the development of environmental insurance standards in the Ukrainian case. For this purpose we consider some insurance risk-related models used by companies in Ukraine. The insurance companies are using common approach to maximize their expected utilities. Their expectations are based on the Ukrainian-related sample data and statistical criteria. The utility functions commonly used depend on regular income, accidental losses, fees for insurance, risk premium and risk aversion measures. We suggest that the particularities of the transition economy , especially the mixture of market and central-planning mechanisms, imply on the utility function arguments and so the arguments mentioned are values with high uncertainty levels. It means that the corresponding utility function has large standard deviation, what means, in terms of financial analysis, that the risk increases. We call that sort of risk deviation-related risk and distinguish utility-related risk aversion measure. That is why we state that risk in transition economies has two different images. Thus we consider both classes of risk while analyzing the sample data and identifying the business behavior. This requires a new approach to insurance problem solution. We introduce a new mathematical methodology which allows to consider risk characterization problem for both classes of risk as pattern recognition problem. We suggest two-stage approach for the solution of the problem. On the first stage the statistical pattern recognition problem, is formulated. We have developed a new pattern-recognition method for identifying deviation-related utility-related classes of risk. On the second stage we consider the problem of expected utility maximization. The solution of the original insurance problem coincides with the solution of this stochastic optimization problem. In the Ukrainian case the approach suggested provides a new mathematical basis for economical analysis in the sphere of the national insurance regulatory policy, rationalization of the environmental standards system and compatibility with the Western and American ones.

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