1. Risk and Risk Management
What is risk?
What is risk management?
What kind of risk is insurable?
Where is insurance in the big picture of risk management?
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2. Risk Two Important Meanings of Risk
A situation is riskier than another when
(1) there is greater expected loss
Example: young male drivers are riskier than middle-aged drivers
(2) there is greater variance (less predictability) of outcomes
Example: a bio-tech stock is riskier than a utility stock
Ins 301 Ch.1

3. Example
If I expect to loss $300 in the next year, $400 in the year after, how much I expect to lose?
If I have 20% chance to lose $300 and 80% chance to lose $400, how much I expect to lose?
How to calculate the uncertain in the loss amount?
Ins 301 Ch.1

4. Risk is Costly Greater risk imposes costs (reduces value) Example:
Identical properties subject to damage
Greater expected property loss lowers value of property, all else equal
Greater uncertainty about property loss often lowers value of property, all else equal
Ins 301 Ch.1

5. Indirect Losses Direct Losses often cause indirect losses
Example: What are the direct and indirect losses if a manufacturing plant experiences a major fire?
Ins 301 Ch.1

6. Major Types of Business Risk
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7. Major Types of Personal Risks
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8. Pure Risk versus Other Types of Risk
Generalizations:
Pure risk usually involves large potential losses relative to the expected loss
Pure risk involves events that are firm-specific
Price risk affects many firms
Pure risk is managed by insurance
Price risk is managed by derivatives
Pure risk involves wealth losses to society
Price risk often involves wealth redistributions in society
Nevertheless, use the same framework for management of pure risk and price risk
Ins 301 Ch.1

9. The Risk Management Process
(1) Identification of risks
(2) Evaluation of frequency and severity of losses
(3) Choosing risk management methods
(4) Implementation of the chosen methods
(5) Monitoring the performance and suitability of the methods.
Ins 301 Ch.1

10. Major Risk Management Methods
Ins 301 Ch.1

11. Using Website http://Finance.yahoo.com www.naic.org www.ambest.com
Ins 301 Ch.1