In the world of reinsurance, accurately determining risk is critical. Reinsurance policies are typically taken out on the largest of risks, those that are too big for an individual insurance company to handle alone. Risk embodies the very nature of the business, and actuaries who work in reinsurance must therefore be extremely well versed in the quantification of worst-case scenarios.
To address this challenge, reinsurers use a variety of traditional measures for evaluating risk, such as Probable Maximum Loss (PML), Value at Risk (VaR), and Tail Value at Risk (TVaR). However, in many instances, it can be very difficult for a reinsurer to measure these risks given the information they have at hand.
As a result, the application of Monte Carlo simulation is being considered more often in order to better prepare a variety of industries for a range of events.
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