Risk managers use Risk Management Information Systems (RMIS) to record, track, and analyze losses to help determine appropriate insurance deductibles and policy limits. RMIS must be tailored to individual organizations' unique risk exposures. International risk managers face additional challenges like foreign currency fluctuations, political risks, and varying insurance regulations between countries. They try to develop global insurance programs using local admitted insurers supplemented by international policies. Financial risks also require management through hedging strategies like options, futures, forwards, and swaps.

1. RISK MANAGEMENT
AND
INSURANCE
TOPIC 4
RISK MANAGEMENT 2:
ADVANCED TOPICS

2. 2
Introduction
• Three broad policy issues facing risk managers:
Risk Management Information Systems (RMIS).
Determining the appropriate amount of loss exposure
to retain.
International loss exposures.

3. 3
RMIS
• Risk managers use Risk Management Information
Systems (RMIS) to:
 Record,
 Track and analyze losses,
 Keep records to plant, property and equipment and how they are
protected from losses,
 Statistical Analysis, using past loss help to forecast losses.
• RMIS must be adapted to the needs of the individual organizations.
Each organization facing different hazards (earth quake or flooding),
different liability exposures (some have chemicals, some firms
manufacture products) and differences in property value
fluctuations. (Some having significant annual inventory annual
changes)
• RMIS should be tailored to the needs of the firms.

4. 4
Loss Data
• Loss records including injuries to workers, liability claims,
or assets losses are the foundation of RMIS.
• Computerized data bases records on:
 Frequency, severity, causes, final outcome of the losses
are kept.
 Outcomes are analyzed by statistical techniques such as
regression analysis.
• RM analyses the data for developing an effective way to lower the
number of accidents and costs. (Classification such as: age,
experience, weather conditions, time of the day)
• Operating RMIS is not easy, as you may have inaccurate loss data,
subsequent analysis or misleading forecasts.
• Comp. Should be updated, data should be audited randomly to
enable accuracy.

5. 5
Example1: RM analyisis on information system data for developing an
effective way to lower the no. of accidents, no. of deaths due to
accidents and costs.

6. Example 2: RM analyisis on information system data for developing an
effective way to lower the no. of accidents, no. of deaths due to
accidents and costs.
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7. Example 3: RM analyisis on information system data for developing an effective
way to lower the no. of accidents, no. of deaths due to accidents and costs.
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8. Example 4: RM analyisis on information system data for developing an effective
way to lower the no. of accidents, no. of deaths due to accidents and costs.
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9. Example 5: RM analyisis on information system data for developing an
effective way to lower the no. of accidents, no. of deaths due to accidents and
costs.
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10. 10
Deductible and Policy Limits
• Deductibles (Retentions): Cause insured to bear the first
dollars of a loss.
• Policy Limits: determine maximum insurance recovery.
 if a loss is equal to or is less than the deductible, the insured
bears the cost.
 If a loss is greater than the policy limits, the insured bears the
cost of any applicable deductible and the amount of loss above
the policy limit. (example)
• Problem:
 How much loss exposures to
retain;
 How much loss exposures to
transfer

11. Deductible and Policy Limits contn’d..
 Increasing policy limits, increases the premium cost but
the increase is not proportional. (when the limit doubles,
we do not have double premium).
 Increasing deductible, reduces the premium cost, but the
reduction is not proportional. (when the deductible
doubles, we do not have half premium).
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Deuctible Size, Plolicy Limits and the Premium Payments

12. The Two Extremes:
Overinsurance and Underinsurance
• For ‘lower premium - higher retention’ trade off we
describe two extremes:
• Overinsurance:
 Is the situation in which insurance benefits exceed the
actual loss of an insured.
 Can be a problem for the insurer because it may tempt
the insured to make a false claim inorder to profit
financially.
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13. The Two Extremes: Overinsurance and Underinsurance contn’d...
• Inadequate insurance coverage by the policy holder (the insured).
• In the event of a claim, underinsurance may result in economic
losses to the policy holder (the insured), since the claim would
exceed the maximum amount that can be paid out by the insurance
policy.
• While underinsurance may result in lower premiums paid by the
policy holder, the loss arising from from the claim may far exceed
any marginal saving in insurance premiums.
• Situation works as if there is a co-insurance agreement between the
insurer and the insured in case of a loss. This is why sometimes
called co-insurance penalty. Risk is accepted to be shared between
the insurer and the insured at the proportion of inadequacy in the
insurance coverage.
UNDERINSURANCE:

14. Financial and Other Considerations
Risk manager should think:
1. Tax implications (Tax deductible expenses)
2. Ability to pay Losses
 Usually lower policy limits is favoured but:
a) the liquidity of assests-is there sufficient cash?
b) The stability of net income.
c) The amount of net worth.
d) The increased cost of capital (Risky to lenders and investors)
3. Psychological Factors: experience, attitudes toward risk, habit and
intuition.
4. Social Ethical Concerns:
In the absence of adequate funding, uninsured losses could bankrupt
organizations producing ethically undesired consequences. (e.g.
Under-compensated dead, injured employees, polluted environment,
unemployed workers).

15. 15
International Risk Management
• Multinational and international firms operate worldwide.
They face:
1. Foreign Currency: measurement and financing problems.
2. Political Risk: Trade embargoes cancellation of export licenses,
expropriation (nationalization of foreign-owned
property, war, terrorism, cultural differences)
3. Risk financing arrangements and practices vary widely throughout
the world.
4. Movement of goods,
a) Marine Insurance (inland and ocean) are important.
b) Income Insurance: pays for losses caused by delays in
receiving shipment are popular.

16. 16
Foreign Insurance
• Generalization about foreign insurance arrangements are difficult to
make.
• Some countries allow foreigners to insure foreign owned property by
their own brokers and insurers (e.g. USA).
• Insurers authorized to do business in an other country is called
admitted insurers.
• Some foreign countries levy fines and other penalties on companies
using non-admitted insurers.
• Admitted insurers can be desirable because premiums and losses
are dominated in local currency.
• Some RMs may prefer non-admitted insurers if they provide familiar
policies with a common language and laws and more, non-admitted
insurer is providing international coverage for a large number of
foreign operations.

17. 17
Foreign Insurance contn’d...
• Firms try to develop a global insurance program (e.g. US
firms):
 An international insurer (or broker) having an international
network of associations with local insurance companies.
 Using admitted insurers in each country or a region but
purchase a difference-in-conditions (DIC) policy from a for
example US insurer.
 DIC policy is written on a manuscript, tailor-made basis.
 DIC policy supplements the local (foreign) property coverage
by broadening the covered perils, increasing policy limits or
doing both.
 DIC policies allow e.g. the US firms to pay premiums to a US
insurer and collect losses in $s if foreign insurer do not
provide all the coverage the risk manager specifies.
 With the DIC policy, the US firm can appeal global uniformity
in coverage because the DIC supplement brings all policies
up to its limits.

18. Financial Risk Management
• In addition to pure risks, firms face contingencies called
financial risks.
 Cost of capital, cash flow management issues.
Interest Rate Risk: caused by increasing interest rates reducing
market value of fixed income securities.
Credit Risk: caused by a borrower defaulting on a loan.
Currency Risk: caused by fluctuations in the value of domestic
currency against foreign currencies.
Liquidity Risk: caused by having to liquidate an investment at an
investment quickly.
Market Risk: caused by having to liquidate an investment at an
unfavorable price.

19. 19
Financial Risk Management contn’d..
• Potential loss sources can be managed by:
Avoidance,
Assumption
Transfer
• Since these exposures are not predictable and some
exposures could prove catastrophic, insurance is not
thought to be an option.
• Among the possible financial market transactions are:
1. Traded options
2. Futures contracts
3. Forward contracts
4. Swaps (Currency and interest swaps)