What is VAR and how it is useful in risk management tool?

VAR (Value at Risk) models are accepted by banking and insurance organizations as a risk management tool to control risks. VAR is defined as the maximum potential change in value of financial instruments portfolio with a provided probability for certain time period. VAR approach is useful for risk management and regulatory purpose. The main aim of VAR approach in risk management and capital regulation is to bring capital requirements close to underlying risks of assets in a portfolio. This approach is really important for insurance organizations as they operate the sufficient capital to cover the liabilities and claims in future on a long-term basis. Risk exposure is also covered through investment rules by restricting asset categories. Because of VAR tools, the quantitative objection in risk management tools is decreasing.
VAR is a financial engineering tool used by insurance companies. Some other tools include credit assessments of individuals, pricing of risks and valuations of combined risks of companies that engage in multiple markets. Asset liability management and revenue management are optimized tools for financial management and risk management.