PowerPoint Slides for Professors Spring 2010 Version

PowerPoint Slidesfor Professors

Spring 2010 Version

This file as well as all other PowerPoint files for the book, “Risk Management and Insurance: Perspectives in a Global Economy” authored

by Skipper and Kwon and published by Blackwell (2007), has been created solely for classes where the book is used as a text. Use or

reproduction of the file for any other purposes, known or to be known, is prohibited without prior written permission by the authors.

Visit the following site for updates:http://facpub.stjohns.edu/~kwonw/Blackwell.html.

To change the slide design/background,[View] [Slide Master]

W. Jean Kwon, Ph.D., CPCUSchool of Risk Management, St. John’s University

101 Murray StreetNew York, NY 10007, USAPhone: +1 (212) 277-5196

E-mail: [email protected]

Risk Management and Insurance: Perspectives in a Global Economy

1. Introduction to Risk Management and Insurance

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3

Study 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

4

Risk and Economic Development (Figure 1.1)

Level of Economic Development

Risk

5

The Importance of an International Perspective

6

The 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.

7

The 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.

8

The 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

9

World Merchandise Trade and GDP (Figure 1.2)

Source: WTO

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The Importance – FDI

The importance of “foreign direct investment (FDI)”• 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

12

Growing 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 Growth

Reduce long-term financial variability and render firms more competitive

From a macroeconomic standpoint, reduce the number of commercial and industrial enterprises that would otherwise become insolvent

Via effective loss control measures, reduce the frequency and severity of causes of economic losses, such as work-related injuries and work interruption

Reduce production costs, thus making goods and services at lower cost

14

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.

15

Country Classifications – By State 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”

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 Least

developed countries

Centrally planned economies• Also known as planned

economies, Communist countries, and the second world

BRIC

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World’s Distribution of GDP, Trade & Population (2002)

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World’s Distribution of GDP, Trade & Population (2009)

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Country Classifications by Membership

International Organizations The United Nations The International Monetary Fund The World Bank The World Trade Organization (WTO) The World Health Organization (WHO)

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

Other (newer) organizations?

19

OECD Member Countries

E.U. Members and Applicants

Map

Risk Classifications

Risk

Loss exposure

Peril

Hazard• Physical hazard• Moral hazard

Risk Classifications – Risks

Pure risk

Financial risk• Market risk

• Interest rate risk• Exchange rate risk• Other systematic risk

• Credit (counterparty) risk• Price risk

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

Strategic risk

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

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.

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

Chapter 9 (Social Insurance)Chapter 20 (Insurance Globally)

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 retrocessionaireChap 21 (Life Insurance)

Chap 22 (Nonlife Insurance)Chap 23 (Reinsurance)

26

The Changing Environment and Risk Management

RapidlyChanging

Environment

GreaterUncertainty

Increased Need for Effective

Risk Management

27

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?

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Discussion Question 2

Is the study of risk management becoming more or less important in your country?

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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

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 5

What do you think are the prerequisites for the development of insurance in economically underdeveloped countries?