1. PowerPoint Slides for Professors Spring 2010 Version PowerPoint Slides for 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.htmlhttp://facpub.stjohns.edu/~kwonw/Blackwell.html. To change the slide design/background, [View]  [Slide Master] W. Jean Kwon, Ph.D., CPCU School of Risk Management, St. John’s University 101 Murray Street New York, NY 10007, USA Phone: +1 (212) 277-5196 E-mail: Kwonw@stjohns.eduKwonw@stjohns.edu

2. Risk Management and Insurance: Perspectives in a Global Economy 11. Sociocultural Effects on Risk Management Click Here to Add Professor and Course Information

3. Study Points  The intersection of culture and risk management  Culture and informal risk management arrangements  Microfinance  Risk perception theories and formal insurance 3

4. Culture and Risk Management 4

5. The Nature of Culture  Culture The customary ways of thinking and behaving of a particular population or society Knowledge and values shared within a society A mental map for appropriate behavior within a society  Socialization We learn culture through the process of socialization. This process shapes every human’s emotions, opinions and actions.  Culture has both visible and invisible dimensions. 5

6. Gender  Sex is an individual’s biological maleness or femaleness. The cultural role that societies attach to each sex is known as gender.  Most societies exhibit a gender hierarchy. Traits associated with males – although not necessarily male – valued over traits associated with females  Gender roles can play an important part in risk perception and management. Asia Africa 6

7. Language and Communication  Language A system of communication using sounds put together according to a set of rules More individuals speak Chinese than any other languages worldwide English is the official language of more countries (58) than any other languages. English is the most common business language worldwide, with it often being the lingua franca.  Language and misunderstandings  Indirect communication Paralanguages (non-verbal element of communication) Kinesics (interpretation of body languages) 7

8. World’s Major Languages (Table 11.1) 8

9. World’s Major Languages 9 http://www.theodora.com/maps/world/world_language_map_transparent.gif

10. Ethnocentrism and Cultural Relativism  Ethnocentrism Each culture should be examined using its own standards and value system, not that of the observer.  Cultural relativism One’s own culture is superior to others and one judges other cultures by the standards of one’s own.  Both cultural relativism and ethnocentrism represent extreme viewpoints. Generally, cultural relativism is preferable. Ethnocentrism can lead to failure in cross-cultural communication and business. 10 Insight 11.1

11. Morals and Ethics Morals  A normative concept  Concerned with what individuals ought to do, with that which is fundamentally right and wrong in the society Ethics  A positive concept  The rules that guide behavior and flow from adherence to moral precepts 11

12. Morals and Ethics  Theories Moral relativists Moral absolutists Internal conflict arises when individuals are placed in situations where a group’s morals differ from their own. Moral relativism and absolutism represent extreme viewpoints.  A case – payment of bribes (page 267) OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 12 Insight 11.2

13. Culture and Informal Risk Management Arrangements 13

14. Making a Living  Foraging  Production Horticulture Pastoralism Agriculture Industrialization  Distribution Making changes Reciprocity Balanced reciprocity Generalized reciprocity Negative Reciprocity Redistribution 14

15. Groups and Social Organizations  Households Extended family Nuclear family  Marriages Gives each partner access to the labor and labor products of the other, thus enhancing family security In some societies, remarriage serves as a type of social security. The levirate custom In many societies, one or more economic transactions may accompany marriage. Bride price (or bride wealth) Dowry 15

16. Maintenance of Order  Every society creates political organizations for resolving conflicts to prevent the breakdown of social order. Religion and magic serve similar functions.  Political organization Positive sanctions Negative sanctions  Belief systems Religion Magic 16 Insight 11.4 (Voodoo or Insurance)

17. Voodoo Car and Tarrots 17 http://www.bassgoddessgreta.com/new%20orleans/voodoo_car_1.htmhttp://www.astroamerica.com/t-voodoo.html

18. Major Religions (Figure 11.1) 18

19. Major Religions (new) 19 Source: http://upload.wikimedia.org/wikipedia/en/b/b2/Major_religions_distribution.png

20. Buffering Mechanisms  Informal buffering mechanisms Practices designed to reduce consumption or income variability Buffering mechanisms reduce uncertainty.  Morbility  Diversification  Storage  Distribution and redistribution 20

21. Informal Insurance Systems  Remain the mainstay in most developing countries and important in developed countries Pooling work opportunities, income and risk of all members of the extended family or group Solving the information problems that plague more formal systems ROSCA (Insight 11.6)  Informal risk-sharing practices sustainable where: Financial institutions and markets are not fully developed or widely accessible Private property rights, especially regarding contracts, are not fully developed and formalized 21 Insight 11.6 & 7

22. Informal Insurance Systems  Potential advantages over formal insurance systems Reduce adverse selection and moral hazard problems Realize cost savings compared with formal ones  Potential disadvantages A very harmful event for which a person (family) is in need of assistance can affect the entire family (village). Certain cultural or legal norms can render some members of society particularly vulnerable under informal arrangements. 22

23. Microfinance 23

24. Microfinance  Why the poor are badly served Insight 11.8  Microfinance as a solution The provision of one or more financial services in small amounts to individuals (or a group of individuals) who have few financial resources and who might otherwise not have access to such services  Service providers ACCION International Grameen Bank Private entities now entering the market 24

25. More about Microinsurance W. Jean Kwon (2010). “An Analysis of Organizational, Market and Socio-cultural Factors Affecting the Supply of Insurance and Other Financial Services by Microfinance Institutions in Developing Economies,” The Geneva Papers (Spring) 25

26. The Poor  The World Bank 103 out of 209 countries are low-income or lower-middle income economies (July 2008). 1 billion people survived on a daily income of $1.08 in 2004 (at 1993 purchasing power parity).  UNCDF (2005) 80% of global population lived in poverty, albeit not absolute poverty in 2005. 26

27. Microinsurance  Insurance accessed by [the] low-income population, provided by a variety of institutions that Run in line with structured insurance practice Help society achieve the “outreach the poor” goal  Potential clients The poor Individuals with low credit or a history of bankruptcy In developing and developed economies 27

28. The MIX Market (mixmarket.org)  As of May 2008 1205 MFIs, including 329 Non-banks 503 NGOs  As of May 2009 1400 MFIs, including 386 Non-banks 557 NGOs 28 Asset Distribution

29. Distribution of Assets by Region (2007) 29 Region Asset DistributionLoan Distribution Amount (US$ Million) World Share Amount (US$ Million) World Share East Asia & the Pacific9,07259.40%5,92755.71% Latin America & the Caribbean 3,48822.84%2,83626.66% South Asia1,85712.16%1,16410.94% Middle East & North Africa3922.57%3293.09% Eastern Europe & Central Asia 2511.64%2322.18% Africa2131.39%1501.41% Total15,272100.00%10,639100.00% This distribution is based on the heat map analysis (January 2009) by the MIX and does not include assets of 281 institutions whose microfinance business represents less than 91% of their operations in 2007.

30. Risk Perception Theories and Formal Insurance 30 See also Chapter 4 (Societal Risk Assessment and Control)

31. Psychological Risk Perception and Insurance  It provides guidance as to the types of risk for which individuals are more likely to seek loss control, insurance or other risk management techniques.  Consumers consider not only the probability and amount of loss, but also the space and time dimensions, the catastrophic potential, and the degree of personal concern. We underestimate risks that we voluntarily assume and are controllable. The importance of risks that are imposed, are uncontrollable, and carry unknown effects is overstated. 31

32. Intuitive Rating of Risk (Figure 11.2) 32

33. Cultural Risk Perception and Insurance  The anthropological theory of risk perception is more relevant for decision-making at the group level, including nation-states.  Individuals and businesses in societies that place a greater emphasis on solidarity are less likely to seek legal redress for perceived wrongs.  Increasing wealth of a country is associated with movement toward low group.  The mutual form of insurance organization would be more readily considered in countries with a collectivist view. 33

34. Conclusions  Our understanding of the impact of culture on risk perception, decision-making and insurance remains rudimentary.  Governments are allowing greater freedom in individual decision-making and relying more on markets to allocate societal resources. Freedom of choice is a basic tenet of a free society, provided that choice does not impose significant costs on others. Increasingly, individual and business choices carry externalities whose potential for widespread harm is unprecedented. The social sciences offer potentially great assistance in satisfactorily resolving these issues. 34

35. Discussion Questions 35

36. Discussion Question 1  “Bribes are always inappropriate.” Do you agree or disagree? Justify your answer. 36

37. Discussion Question 2  Why is an understanding of how individuals perceive risk important? To whom is it important? 37

38. Discussion Question 3  Why is an understanding of how groups perceive risk important? To whom is it important? 38

39. Discussion Question 4  Locate at least three sentences or concepts found in this book that suggest an ethnocentric orientation by the authors. How would you change the presentation to be less ethnocentric? 39

40. Discussion Question 5  Would you expect to find differences in the demand for life insurance between societies that are primarily individualist versus egalitarian? What about between individualists vs. hierarchists? Explain your rationale. 40