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Review.

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Presentation on theme: "Review."— Presentation transcript:

1 Review

2 Principles of Risk Management
Insurance Decision-Theory Systems Safety

3 1. Introduction Lecture Reading Textbook Chp 1,2
Beck (2002) – Risk Society Houck (2010) – Deepwater Horizon Leveson – System Safety Textbook Chp 4, p53-68; Chp 5, p73-84 Definition of Risk, Law of Large Numbers, Subjective v Objective Risk, Definition of Peril & Hazard. Methods of handling risk. Catastrophes (Man-made v Natural) Risk Management Process

4 2. Risk Analysis & Decision-Making
Lecture Risk Analysis Calculating expected loss (actuarially fair premium). Variance, Standard deviation. Risk Pooling Covariance & correlation

5 2. Risk Analysis & Decision-Making
A health insurer based in Spain has an insured pool of 100,000 people. It insures them against treatment for cancer only. European statistics show that rates of cancer incidence in the general population are approximately normally distributed with a mean of 194 per 100,000 and standard deviation of 30. Treatment costs historically average out at €275,000. What is the actuarially fair premium? (194/ ) x € = € The insurer wants to have 99% confidence that it will have sufficient capital to meet its potential liabilities. How much capital should it set aside? There is only a 1% chance that more than [194 + (2.33 x 30)] people will become ill with cancer. If people did become ill then the insurer would be faced with claims totalling €72.57 million (263.9 x €275,000).

6 2. Risk Analysis & Decision-Making
Lecture Reading Decision-Making Utility Theory + Decision- Making Ambiguity Aversion Comparative Ignorance Fox and Tversky (1995), Ambiguity Aversion and Comparative Ignorance. The Quarterly Journal of Economics. P

7 3. Risk and the Insurance System
Lectures Reading Risk and the Insurance System Reinsurance Captives Legal Principles of Insurance Textbook, Chp 6, 7 Textbook, Chp 8,9

8 4. Risk Management Issues
Lectures Reading Public Sector Risk Management Risk Pooling & Health Care Financing Risk Perception & Risk Communication Pate-Cornell, E. 2002, Risk and Uncertainty Analysis in Government Safety Decisions (Read to End of Section 3, P. 638) Smith & Witter (2002, p.1-11) Wardman (2008), Section 1 & 2

9 Other Reading Not necessary for the exam…
McKenna (2011), Why earthquakes are hard to predict, New Scientist. Martin, S. (2010), Betting on the Lives of Strangers: Life Settlements, STOLI and Securitization, U. of Pennsylvania Journal of Business Law. Christakis, N. & Fowler, J. (2010), Social Network Sensors for Early Detection of Contagious Outbreaks. Sterman, J.D. (2011), Communicating climate change risks in a skeptical world, Climatic Change.

10 Final Exam 80% of total score 50 questions (answer all)
No negative marking Note: You will need calculator, 2B Pencil. Good Luck!


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