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📉 '''Value at risk (VaR)''' is a statistical measure that estimates the maximum potential loss a portfolio, line of business, or entire [[Definition:Insurance company | insurance company]] could experience over a specified time horizon at a given [[Definition:Confidence level | confidence level]]. Originally developed in banking, VaR has become a cornerstone of [[Definition:Enterprise risk management (ERM) | enterprise risk management]] in insurance, where it helps quantify exposure to [[Definition:Underwriting risk | underwriting risk]], [[Definition:Investment risk | investment risk]], [[Definition:Catastrophe risk | catastrophe risk]], and [[Definition:Operational risk | operational risk]] in a single, comparable figure.

⚙️ An insurer calculating VaR might determine, for example, that there is only a 1% probability its property [[Definition:Catastrophe loss | catastrophe losses]] will exceed $500 million in a given year — expressed as a 99% VaR of $500 million. The calculation can rely on [[Definition:Historical simulation | historical simulation]], [[Definition:Variance-covariance method | variance-covariance]] (parametric) models, or [[Definition:Monte Carlo simulation | Monte Carlo simulation]], each with different data requirements and assumptions. [[Definition:Solvency II | Solvency II]] in Europe explicitly uses a VaR framework — the [[Definition:Solvency capital requirement (SCR) | solvency capital requirement]] is calibrated to a 99.5% VaR over a one-year horizon, meaning carriers must hold enough capital to survive all but the most extreme 0.5% of scenarios. Internal [[Definition:Capital model | capital models]] approved by regulators allow sophisticated insurers to compute VaR using their own risk profiles rather than relying on standardized formulas.

🎯 While VaR provides an intuitive summary of risk exposure, insurance professionals must understand its limitations. By definition, VaR tells you the threshold of a tail scenario but nothing about how severe losses could become beyond that threshold — a shortcoming that [[Definition:Tail value at risk (TVaR) | tail value at risk (TVaR)]] addresses by averaging losses in the tail. Catastrophe-exposed lines, where loss distributions are heavily skewed, can produce VaR figures that understate true peril if the model's tail assumptions are too optimistic. Despite these caveats, VaR remains indispensable for [[Definition:Capital allocation | capital allocation]], [[Definition:Reinsurance purchasing | reinsurance purchasing]] decisions, and regulatory compliance across global insurance markets.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Tail value at risk (TVaR)]]
* [[Definition:Solvency capital requirement (SCR)]]
* [[Definition:Enterprise risk management (ERM)]]
* [[Definition:Monte Carlo simulation]]
* [[Definition:Catastrophe model]]
* [[Definition:Capital model]]
{{Div col end}}

Definition:Value at risk (VaR) - Revision history

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