Value at risk approach in the risk management of institutional investments and an application for life insurance companies in Turkey

Institutional investments play a vital role within the development process of the financial markets. Since the share of institutional investors in the financial markets of developed economies is considerably large, the role of growing institutional investments in the development of capital markets should not be ignored. Life insurance companies- a type of institutional investor- provide resources to the economy through corporations, by allocating the household savings accumulated to various financial instruments. Although in Turkey the effect of institutional investments in general and life insurance companies on the financial markets is quite limited yet, a rapid development is expected in this respect. With the acceptance of the new pension system in Turkey, the savings acquired by private pension funds and life insurance companies will increase leading to a subsequent increase in the financial investments they make. Along with the development of derivative markets, derivative instruments will have a considerable share in the investment portfolios of institutional investors. In order for the life insurance companies to compete in a rapid growing sector, investment risk management will become important more than ever in the near future. Value at Risk (VaR) Approach, is a relatively new risk management tool which has started to be used first by banks and then by other institutions in recent years. The purpose of this study has been to suggest a risk management application method that could be used by life insurance companies, in Turkey, which have promising potentials. Towards this end, the applicability of present Value at Risk methods under Turkey specific conditions and for life insurance companies have been tested. It has been concluded that Risk Metrics methodology, given that it is adjusted for long term investments, is the most appropriate method under Today's conditions, for life insurance companies in Turkey.