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!