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PowerPoint Slides for Professors Spring 2010 Version.
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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 University101 Murray StreetNew York, NY 10007, USA Phone: +1 (212) 277-5196E-mail: Kwonw@stjohns.edu
Risk Management and Insurance: Perspectives in a Global Economy1. Introduction to Risk Management and Insurance Click Here to Add Professor and Course Information
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
Risk and Economic Development (Figure 1.1) Risk Level of Economic Development
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.
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.
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
World Merchandise Trade and GDP (Figure 1.2) Source: WTO
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.
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.
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
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.
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
Country Classifications by Membership International Organizations 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 • The United Nations • The International Monetary Fund • The World Bank • The World Trade Organization (WTO) • The World Health Organization (WHO) Other (newer) organizations?
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 Chapter 9 (Social Insurance) Chapter 20 (InsuranceGlobally) • 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
Insurance Classifications Chap 21 (Life Insurance) Chap 22 (NonlifeInsurance) Chap 23 (Reinsurance) • 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
Greater Uncertainty Rapidly Changing Environment Increased Need for Effective Risk Management The Changing Environment and Risk Management
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?
Discussion Question 2 Is the study of risk management becoming more or less important in your country?
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.
Discussion Question 4 Randomly select one economically developed country and one developing country, and compare classification of insurance between the two countries.
Discussion Question 5 What do you think are the prerequisites for the development of insurance in economically underdeveloped countries?
