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1. Introduction to Risk Management and Insurance

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Title: 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

2
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

3
  • Course Syllabus

4
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.

5
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.

6
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.

7
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

8
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

9
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

10
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

11
  • The Importance of an International Perspective

12
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

13
World Merchandise Trade and GDP (Figure 1.2)
Source WTO
14
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.

15
  • Risk Management and Economic Growth

16
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

17
Risk and Economic Development (Figure 1.1)
18
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.

19
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.

20
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.

21
  • The Language of Risk and Insurance Internationally

22
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.

23
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

24
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

25
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.

26
Worlds Distribution of GDP, Trade and Population
27
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)

28
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

29
OECD Member Countries
30
E.U. Members and Applicants
31
Risk Classifications
  • Risk
  • Loss exposure
  • Peril
  • Hazard
  • Physical hazard
  • Moral hazard

32
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

33
Risk Classifications Risks
  • Operational (internal) risk
  • Personal risk
  • Personnel risk
  • Property risk
  • Liability risk
  • Concentration risk
  • Reputational risk
  • Strategic risk

34
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

35
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

36
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

37
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

38
The Changing Environment and Risk Management
39
  • Discussion Questions

40
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

41
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

42
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.

43
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

44
Discussion Question 5
  • What do you think are the prerequisites for the
    development of insurance in the following
    countries?
  • China
  • India
  • Russia
  • Saudi Arabia
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