1. IRU07203: THEORY OF RISK AND INSURANCE

2. INTRODUCTION COURSE LECTURER
MR. LUFUNGA, MUSA – ADIRM (IFM), PGDFM (IFM), MBA – RISK MANAGEMENT AND INSURANCE (THE NORTHERN UNIVERSITY OF MALAYSIA)
OFFICE: ROOM 515, 5 TH FLOOR, BLOCK A
CONTACT:

3. Total Coursework = 40 marks Final Examination = 60 marks
OUR ROAD MAP
There will be 10 lectures
There will be one assignment, two invigilated tests and Final examination.
Assignment = 10 marks
Test 1 = 15 marks
Test 2 = 15 marks
Total Coursework = 40 marks
Final Examination = 60 marks
NOTE: “Missing assignment and tests will not be entertained”

4. EXPECTED OUTCOMES
Sub-Enabling Outcomes:
Classify risks
Evaluate the impact of risk to individuals and firms
Apply risk management in various environments
Examine how insurance works
Examine the historical development of insurance

5. EXPECTED OUTCOMES
6). Classify insurance products
7). Apply legal principles in insurance
8). Analyze insurance markets.

6. 1. THE CONCEPT OF RISK
There is no single definition of the term ‘RISK’
Risk is a condition where there is a possibility of an adverse deviation from an expected outcome (Teale, 2007)
ISO31000: 2009 defines risk as the ‘effect of uncertainty on objectives’

7. 1.1 CLASSIFICATIONS OF RISK
Risk can be classified in many different ways
These classifications include:
Financial and nonfinancial risks
Dynamic and static risks
Pure and speculative risks
Fundamental and particular risks

8. 1.1 CLASSIFICATIONS OF RISK cont..
PERSONAL RISKS: direct affect an individual
Involve a possibility of a complete loss or destruction in our ability to earn income; extra expenses and reduction of financial assets caused by:
Premature death
Dependent old age (insufficient income during retirement)

9. 1.1 CLASSIFICATIONS OF RISK cont..
Sickness or accident (poor health)
Unemployment
PROPERY RISKS: arise from the loss of property through its vulnerability to destruction or theft
Direct loss: arises through the physical damage, destruction or theft of the property

10. 1.1 CLASSIFICATIONS OF RISK cont..
Indirect or consequential loss: financial loss that results indirectly from a loss to the exposed property
LIABILITY RISKS: result from the intentional or unintentional injury to other people or damage to their property through carelessness or failure to take necessary precautions -

11. 1.1 CLASSIFICATIONS OF RISK cont..
They can be personal or
Arise through business activities

12. 1.2 THE NATURE OF INSURANCE
There is no single definition of insurance
Different authors provide different definitions
The most interesting definition is the legal definition

13. 1.2 THE NATURE OF INSURANCE cont..
Insurance is a contract where by one person or party (the insured) agrees to pay money (the premium) to another person (the insurer) in order to secure some benefit, usually in the form of payment of a sum of money or its equivalent on the happening of a specified event that is generally adverse to the interests of the insured

14. 1.2 THE NATURE OF INSURANCE cont..
Insurance is a risk spreading mechanism that allows buyers of insurance to transfer some of the risks associated with their business activities to insurance enterprises.
It works on a “pooling” principle

15. 1.2 THE NATURE OF INSURANCE cont..
Pooling means is the grouping together those risks exposed to the similar loss exposure.
It gives security to those who insure
The main purpose of insurance is to offer protection against risks faced by individuals and organizations.

16. 1.3 DEMAND FOR INSURANCE
Demand for insurance is the function of personal and business assets in the country concerned.
Very low spending in poor countries
High spending as societies become richer
Demand for insurance varies overtime
Depends on various factors other than degree of economic activity and growth in a given market

17. 1.3 DEMAND FOR INSURANCE cont..
The factors include:
Changes in the structure of the economy
Can increase/reduce
E.g. changing from a manufacturing to a service economy may reduces demand for industrial property and engineering insurance
But increase demand for professional indemnity insurance

18. 1.3 DEMAND FOR INSURANCE cont..
The extent of compulsion to insure
Governments, trade or professional bodies, business partners may impose certain types of insurances to be compulsory

19. 1.3 DEMAND FOR INSURANCE cont..
Government influence in taxation policy
Policies affecting insurance and social security policy
E.g. diminution in state provision of (Workers’ Compensation benefits and health care) may stimulate increased demand for privately insured alternatives, or vice-versa

20. 1.3 DEMAND FOR INSURANCE cont..
Social values and attitudes
Systems of beliefs e.g. fatalism or the dictates (an order) of a particular religion may dampen the demand for insurance
Fatalism is the belief that all events are established and therefore are unavoidable.

21. 1.4 WHAT RISKS CAN BE INSURED?
Insurance techniques can be applied to many risks
But there are limits to what can be insured
In for certain risk to be insured, it must fall within the criteria of insurability
They include the following:
The nature of risk
The dimensions of the loss: (randomness, size, and frequency)

22. 1.5 WHAT RISKS CAN BE INSURED? Cont..
Insurance premium: must be calculable and reasonable
Moral hazard
Public policy
Legal restrictions