Market-consistent modelling was not just attractive to supervisors because it would lead to more objective and exact valuations of insurers’ balance sheets. It also came with the promise of rationalizing insurers’ management of financial risk. Risk management is a somewhat elusive concept that can refer to a wide variety of practices. Historically, risk management has been primarily about the identification, categorization and quantification of risk in the context of finance and insurance (Baud and Chiapello, 2017). In life insurance, for instance, risk management involved the collection of mortality statistics and the calculation of individual risk. As the rich body of historical literature on insurance has shown, however, risk management is not just about the quantification of risk. It also involves various organizational processes through which ‘risks’ are selected, assessed and contained – that is to say, through which risks are ‘made’ (Van Hoyweghen, 2007). Risk management, in other words, is a mode of governance that involves both the analysis and organization of risk. This mode of governance has become increasingly prevalent in a wide variety of domains since the 1990s (Power, 2007).

The history of financial risk management is intimately intertwined with the rise of modern finance theory (especially options pricing theory) and the rapid development of markets for financial derivatives from the 1970s onwards. Options pricing theory legitimized the use of derivatives as instruments for managing financial risk and facilitated the organizational cognition of and communication about risk (Millo and MacKenzie, 2009). The Black–Scholes equation, for instance, allowed for the ‘backing out’ of instruments’ market-implied volatility, allowing managers to put a concrete number on the riskiness of internal portfolios. In the 1990s, moreover, large financial institutions developed internal risk management systems, adopting ‘value-at-risk’ (VaR) as a universal measure of risk, which aided the rationalization of capital allocation across the organization as a whole (Holton, 2002). This development was accompanied by the rise of the Chief Risk Officer, which signalled the increased importance of the risk control function within large financial services groups (Power, 2005). From the late 1990s onwards, moreover, banks’ internal risk management systems also became the basis for capital regulation standards, which further institutionalized the VaR models as core elements of governance in banking (Baud and Chiapello, 2017; Coombs and Van der Heide, 2020).