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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.
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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

10. 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.

11. 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.

13. 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

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

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

18. Country Classifications by Membership
International Organizations
Regional Organizations
The United Nations
The International Monetary Fund
The World Bank
The World Trade Organization (WTO)
The World Health Organization (WHO)
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

20. E.U. Members and Applicants
Map

21. Risk Classifications Risk Loss exposure Peril Hazard Physical hazard
Moral hazard

22. 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

23. 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.

24. 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)

25. 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
Chap 21 (Life Insurance)
Chap 22 (Nonlife Insurance)
Chap 23 (Reinsurance)

26. The Changing Environment and Risk Management
Rapidly
Changing
Environment 
Greater
Uncertainty
Increased Need for Effective
Risk Management

27. Discussion Questions

28. 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?

29. Discussion Question 2
Is the study of risk management becoming more or less important in your country?

30. 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.

31. Discussion Question 4
Randomly select one economically developed country and one developing country, and compare classification of insurance between the two countries.

32. Discussion Question 5
What do you think are the prerequisites for the development of insurance in economically underdeveloped countries?