fall 2008 version professor dan c. jones fina 4355 homework, handout
TRANSCRIPT
Fall 2008 VersionFall 2008 Version
Professor Dan C. Jones
FINA 4355
Homework, Handout
Risk Management and Insurance: Perspectives in a Global EconomyRisk Management and Insurance: Perspectives in a Global Economy
1. Introduction to Risk Management 1. Introduction to Risk Management and Insuranceand Insurance
Professor Dan C. Jones
FINA 4355
Homework, Handout
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Study PointsStudy Points
The importance of an international perspective
Risk management and economic growth
The language of risk and insurance internationally
The environment for risk and insurance internationally
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Risk and Economic Development Risk and Economic Development (Figure 1.1)(Figure 1.1)
Level of Economic Development
Ris
k
The Importance of an International Perspective
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The Importance of an International PerspectiveThe Importance of an 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.
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The ImportanceThe Importance
“Foreign direct investment (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 country’s socio-cultural, demographic, political, and economic circumstances.
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The ImportanceThe Importance
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 World Merchandise Trade and GDP (Figure 1.2)(Figure 1.2)
Source: WTO
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The ImportanceThe Importance
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 country’s sociocultural, demographic, political, and economic circumstances.
Risk Management and Economic Growth
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Growing Importance of Risk ManagementGrowing Importance of Risk Management
A rise in the number of high-value (highly protected) risks
Resource concentration
Pollution as another externality
Risk management has assumed greater importance as its scope continues to expand.
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 GrowthRole 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.
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.
The Language of Risk and Insurance Internationally
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Defining Risk and InsuranceDefining 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 ClassificationsCountry Classifications
By stage of economic developmentDeveloped market economies
Also known as high-income countries, advanced countries, economically advanced countries, industrialized countries, the north, and the first world.
“Newly industrialized economies”
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 ClassificationsCountry 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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World’s Distribution of GDP, Trade and PopulationWorld’s Distribution of GDP, Trade and Population
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Country ClassificationsCountry Classifications
By membership in international organizationsGlobal 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 ClassificationsCountry 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
Ask Students to find information about
other organizations.
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OECD Member CountriesOECD Member Countries
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E.U. Members and ApplicantsE.U. Members and Applicants
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Risk ClassificationsRisk Classifications
Risk
Loss exposure
Peril
HazardPhysical hazard
Moral hazard
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Risk Classifications – RisksRisk Classifications – Risks
Pure risk
Financial riskMarket risk
Interest rate risk
Exchange rate risk
Other systematic risk
Credit (counterparty) risk
Price risk
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Risk Classifications – RisksRisk Classifications – Risks
Operational (internal) riskPersonal risk
Personnel risk
Property risk
Liability risk
Concentration risk
Reputational risk
Strategic risk
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Risk Management ProcessRisk Management Process
The processRisk 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
The view of risk management is changingA 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.
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Insurance ClassificationsInsurance Classifications
Social vs. private insurance
Life vs. nonlife insuranceNonlife 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 diseaseChap 9 (Social Insurance)
Chap 20 (Insurance Globally)
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Insurance ClassificationsInsurance Classifications
Personal vs. commercial insuranceIndustrial insurance
Large risks and mass risks in the E.U.
Direct insurance vs. reinsuranceDirect (writing) insurer, primary insurer
Direct premium
Reinsurer, assuming company
Reinsurance premium
Retrocession and retrocessionaire
Chap 21 (Life Insurance)Chap 22 (Nonlife Insurance)
Chap 23 (Reinsurance)
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The Changing Environment and Risk ManagementThe Changing Environment and Risk Management
RapidlyChanging
Environment
GreaterUncertainty
Increased Need for Effective
Risk Management
Discussion Questions
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Discussion Question 1Discussion 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?
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Discussion Question 2Discussion Question 2
Is the study of risk management becoming more or less important in your country?
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Discussion Question 3Discussion 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 4Discussion Question 4
Randomly select one economically developed country and one developing country, and compare classification of insurance between the two countries.
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Discussion Question 5Discussion Question 5
What do you think are the prerequisites for the development of insurance in economically underdeveloped countries?