Topic 2. Risk and Terminology Bus 200 Introduction to Risk Management and Insurance Jin Park.

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Presentation transcript:

Topic 2. Risk and Terminology Bus 200 Introduction to Risk Management and Insurance Jin Park

Overview Risk Pure vs Speculative Fundamental vs Particular Systematic vs Nonsystematic Objective vs Subjective Risk Averse, Neutral, or Seeker Peril, Hazard ERM, IRM

Risk Deviation from expectation Worse than expected Better than expected Uncertainty concerning a loss Uncertainty Loss

Risk Pure Risk Loss or no loss Fire, Hurricane, Theft Risk management & Insurance Speculative Risk Loss, gain, or no loss/gain Investment, gamble Finance Enterprise Risk Management deals with managing both risks in a firm

Risk Objective Risk Fundamental Risk Systematic Risk Subjective Risk Particular Risk Nonsystematic Risk

Peril (Immediate) Cause of loss Natural versus Human perils Insurable versus non-insurable

Hazard Condition that creates or increases the chance of losses, their severity, or both. Physical hazard Moral hazard Morale hazard

Are you risk averse? Game 1 5% - $1 million 95% - none Game 2 5% - $10 95% - none Game 3 50% - $900,000 50% - $100,000 or $50,000 or $.50 or $500,000

Enterprise risk management IRM: Integrated risk management The process of planning, leading and controlling the activities of an organization to minimize the effects of risk on earnings and capital Requires a (strategic) risk management policy Needs support from the top level of a firm

Enterprise risk management A holistic approach to risks faced by a firm Risk management has to be integrated among various players in a firm Steps in developing an ERM program

Next 3. Loss Exposures ETTI: Chapter 1, pp. 16 – 18 ETTI: Chapter 8, pp. 162 – 164, 170 – 176 ETTI: Chapter 9, pp Business continuity planning: Preparing for the worst, KPMG Insiders, June 10, 2002Business continuity planning: Preparing for the worst 2.U.S. firms underestimate IT risks, Insurance Day, June 14, 2002U.S. firms underestimate IT risks 3.Prudent Man with a Plan, CFO Magazine, June 18, 2002.Prudent Man with a Plan 4.Warning: A batman cape won’t help you fly, New York Times, March 5, 1997.Warning: A batman cape won’t help you fly 5.Legal Dimensions in Recreation, Leisure Activities, and Sports: Negligence Concepts, date and author unknown.Legal Dimensions in Recreation, Leisure Activities, and Sports: Negligence Concepts

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