Final answer:
Insurance Risk is the type of risk modeled on the IRDAI approach for measuring/estimating Economic Capital, given that IRDAI focusses on the insurance sector and the uncertainties associated therein. The correct answer is option c.
Step-by-step explanation:
The student has asked which type of risk is modeled on the IRDAI (Insurance Regulatory and Development Authority of India) approach for measuring/estimating Economic Capital. The types of risk mentioned are Asset Risk, Operational Risk, Insurance Risk, and Credit Risk. In the context of the IRDAI, which primarily regulates the insurance sector in India, Insurance Risk is a key focus when modeling for Economic Capital. Insurance Risk refers to the risk that an insurer may face due to uncertainties in the underwriting process, claims settlements, and actuarial assumptions.
To address the student's question, it's important to understand the different types of risks involved in financial assets. Asset Risk involves the potential loss in value of assets due to market volatility. Operational Risk is associated with the internal processes, personnel, or systems failing or being inadequate within an organization, while Credit Risk involves the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations.
When considering investments in the financial market, it is crucial to analyze risk in terms of the expected rate of return, the actual rate of return, and the level of risk inherent in the investment. Investors need to balance their desire for higher returns with the increased level of risk, and must consider liquidity and the time horizon of their investments.