Risk cubes or price risk and ratings (Part II)

Risk is difficult to measure - so difficult that no single measure seems robust enough for all circumstances. This is especially true of measuring the risk contained in insurance-linked securities. Insurance risk is usually asymmetrically skewed. As a conse-quence, traditional capital market risk measures - expected loss, probability of default, and the standard deviation of return out-comes - are less than perfect to the insurance task. Without a good risk measure, it is impossible to compare the risk-adjusted pricing of insurance-linked notes on a consistent basis. It is impossible to tell which securities are cheap and which are expensive. It is impossible to decide on their value relative to more traditional investments.