1. Introduction to Risk Management and Insurance

1
1. Introduction to Risk Management
and Insurance

• Dr. Jan-Juy Lin
• Dept. of Risk Management and Insurance
• ETP course, CNCCU

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Introduction

• Course Syllabus
• Importance of an international perspective
• Risk management and economic growth
• Language of risk and insurance internationally
• Environment for risk and insurance
  internationally
• Question Discussion

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• Course Syllabus

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Syllabus Course Design

• Objective of this course is to equip the
  students with a broad knowledge of risk
  management and insurance.
• Institutional details with emphasis on current
  practices in Taiwan will also be presented.
• Primary goal is to stimulate critical thinking
  and promote problem solving skills for applying
  general concepts to new sets of problems, new
  types of risks, and new institutional structures.

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Syllabus Expected Learning Outcome

• Understand a broad perspective of risk management
  and insurance covering not only traditional but
  also new types of risk management.
• Understand insurance contracts and institutional
  features of the insurance industry.
• Understand the effects of and the rationale for
  public policies that affect risk management of
  businesses and individuals.
• Possess a conceptual framework for making risk
  management and insurance decisions to increase
  business value and individual welfare.
• Think critically and analytically solve problems
  that confront business managers and individuals.

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Syllabus Teaching Methods

• A student-centered approach will be adopted by
  this course. Not only this course primarily
  utilizes lectures but also encourages class
  discussion.
• Student-instructor dialogue is especially
  encouraged.
• Students are ultimately responsible for their
  own progress by being active and critical
  participant in the learning.
• It is required that all the students shall have
  Pre-Class preparation for the assigned reading
  materials.

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Syllabus Teaching Methods

• Pre-Class preparation is required
• In-Class cold and warm calls occasionally
• for grading participation
• No perfect English skill is needed
• Everyone encouraged to speak and
• discuss
• Happy learning, happy gaining your credits

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Syllabus Textbook and Grade Determination

• Required Textbook Harold D. Skipper W. Jean
  Kwon, Risk Management and Insurance Perspective
  in a Global Economy, Blackwell Publishing, 2007
  (???Taipei WILEY ????).
• Dictionary for Reference???????? (Taiwan
  Insurance Institute), English-Chinese Dictionary
  of Insurance, ??????, 2006
• Grade Determination
• Class Participation 40
• Mid-term Exam 30
• Final Exam 30

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Syllabus Course Schedule

• Orientation
• Introduction to Risk Management and Insurance
• The Nature and Importance of Insurance
• Life Insurance
• Non-Life Insurance
• Reinsurance
• Regulation and Taxation in Insurance Market
• Mid-term Exam

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Syllabus Course Schedule

• Enterprise Risk Management
• Internal Loss Financing
• External Loss Financing
• Risk Management for Catastrophes
• Financial Services Integration
• Future Perspective to Risk Management and
  Insurance
• Final Exam

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• The Importance of an International Perspective

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The Importance of International Perspective

• Decisions about how to deal with some risky
  activities and processes have become incredibly
  complex.
• The world is getting smaller!
• In most markets, a significant proportion of
  goods and services competes directly or
  indirectly with those of other countries.
• The proportion of cross-border trade continues to
  grow worldwide.
• See Figure 1.2

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World Merchandise Trade and GDP (Figure 1.2)
Source WTO
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The Importance of International Perspective

• The importance of foreign direct investment
  (FID)
• FDI inflows tend to grow at rates greater than
  merchandise trade
• Competitiveness is heightened as price
  differentiation becomes a less feasible
  alternative to improved operating efficiency.
  Even firms not directly involved in international
  activities are affected.
• In a global economy, the way risk is dealt with
  naturally differs to suit each countrys
  sociocultural, demographic, political, and
  economic circumstances.

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• Risk Management and Economic Growth

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Growing Importance of Risk Management

• A rise in the number of high-value (highly
  protected) risks (Taipei 101)
• Resource concentration
• Pollution as another externality
• QA Nuclear Leakage Pollution,
• Smelly bean curd, smell pollution
  case,
• Air pollution in mainland China

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Risk and Economic Development (Figure 1.1)
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Growing Importance of Risk Management

• Risk management has assumed greater importance as
  its scope continues to expand.
• In the past, its application was thought of as
  being limited mainly to operational (e.g.,
  manufacturing, marketing) issues.
• Today, it finds application in minimizing
  financial risks to business and in helping
  governments resolve public policy issues.

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Role of Risk Management in Economic Growth

• By reducing long-term financial variability, risk
  management can render firms more competitive.
• From a macroeconomic standpoint, risk management
  techniques can reduce the number of commercial
  and industrial enterprises that would otherwise
  become insolvent.

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Role of Risk Management in Economic Growth

• Effective loss control measures can reduce the
  frequency and severity of work-related injuries
  and illnesses, work interruption, and other
  causes of economic losses.
• It can reduce production costs, which in turn can
  make goods and services available to consumers at
  lower cost.

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• The Language of Risk and Insurance Internationally

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Defining Risk and Insurance

• International risk and international
  insurance commonly refer to
• (1) unintended outcomes and
• (2) insurance transactions that transcend or
  cross national boundaries.
• International risk can also flow from the
  consequences of international business
  activities.
• The importance of the concepts on both a
  cross-border and comparative basis.

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Country Classifications

• By stage of economic development
• Developed market economies
• Also known as high-income countries, advanced
  countries, economically advanced countries,
  industrialized countries, the north, and the
  first world.
• Newly industrialized economies

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Country Classifications

• Developing economies
• Also known as underdeveloped countries,
  undeveloped countries, low- (or middle-) income
  countries, the south and the third world.
• Emerging markets
• Economies in transition

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Country Classifications

• By stage of economic development (continued)
• Least developed countries
• Centrally planned economies
• Also known as planned economies, Communist
  countries, and the second world.

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Worlds Distribution of GDP, Trade and Population
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Country Classifications

• By membership in international organizations
• Global organizations
• The United Nations
• The International Monetary Fund
• The World Bank
• The World Trade Organization (WTO)
• The World Health Organization (WHO)

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Country Classifications

• By membership in international organizations
  (continued)
• Regional organizations
• The Organization for Economic Cooperation and
  Development
• The European Union
• The North American Free Trade Agreement
• Association of Southeast Asian Nations
• Asia-Pacific Economic Cooperation
• Southern Cone Common Market
• Common Market for Eastern and Southern Africa

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OECD Member Countries
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E.U. Members and Applicants
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Risk Classifications

• Risk
• Loss exposure
• Peril
• Hazard
• Physical hazard
• Moral hazard

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Risk Classifications Risks

• Pure risk (Hazard Risk)
• Financial risk (Speculative Risk)
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk

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Risk Classifications Risks

• Operational (internal) risk
• Personal risk
• Personnel risk
• Property risk
• Liability risk
• Concentration risk
• Reputational risk
• Strategic risk

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Risk Management Process

• The process
• Risk analysis
• Identification and evaluation of the possible
  outcomes associated with events or activities
• Risk control
• Exploration of techniques to control adverse
  outcomes
• Risk financing
• How to finance the costs of adverse outcomes that
  occur

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Risk Management Process

• The view of risk management is changing
• A fragmented approach to the management of risk
  is less effective and efficient than an
  integrated approach that involves all the risks
  to which an entity is exposed.
• Enterprise Risk Management (ERM)
• Hazard Risk Financial Risk

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Insurance Classifications

• Social vs. private insurance
• Life vs. nonlife insurance
• Nonlife insurance also known as general
  insurance, property-casualty and
  property-liability insurance
• Life insurance dealing with
• Death
• Living a certain period
• Incapacity (disability and long-term care need)
• Injury or incurring a disease

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Insurance Classifications

• Personal vs. commercial insurance
• Industrial insurance
• Large risks and mass risks in the E.U.
• Direct insurance vs. reinsurance
• Direct (writing) insurer, primary insurer
• Direct premium
• Reinsurer, assuming company
• Reinsurance premium
• Retrocession and retrocessionaire

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The Changing Environment and Risk Management
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• Discussion Questions

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Discussion Question 1

• Is an appreciation for international events
  important to students of risk management and
  insurance, even if they intend to work
  exclusively for domestic firms with no
  international operations?
• Case Study WTC 911 Terrorism

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Discussion Question 2

• Is the study of risk management becoming more or
  less important in your country?
• Case Study
• Chi-Chi 921 EQ, Typhoon, Beijing Olympic
  Game, FIFA World Cup

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Discussion Question 3

• What special risks would you expect multinational
  corporations to encounter that purely national
  firms ordinarily would not encounter?
• Speculate about some of the ways of dealing with
  such special risks.

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Discussion Question 4

• Can you comprehend the following social insurance
  in terms of the coverage in Taiwan ?
• National Health Insurance Scheme
• Compulsory Automobile Liability Insurance
• Student Group Insurance

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Discussion Question 5

• What do you think are the prerequisites for the
  development of insurance in the following
  countries?
• China
• India
• Russia
• Saudi Arabia