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INSURANCE & RISK MANAGEMENT
,
Jinuachan Vadakkemulanjanal
Vimal Jyothi Institute of Management & Research,
Chemperi PO, Kannur Dr , Kerala-670632 www.vjim.ac.in
jinuachan@gmail.com; +91-9447373415; 04602213399; 2212240
SEMESTER III- FINANCE-Elective Course MBA3E33
Part 2
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Plz Down load the Part 1 before this slide of
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Course outcome
Objective To develop an understanding among
students about identifying analyzing and
managing various types of risk. Besides the
students will be in a position to
understand principles of insurance and its
usefulness in business
Pedagogy Lectures, Assignments, Practical exercises,
Case discussion and Seminars etc
Elective
Course
4 Credits * 4 teaching hrs. * Per week
3Hrs. IAT & End Sem. Exam * Marks
20+80 3Insurance & Risk management VJIM
Module-1
Slide: Part 1A
Concept of Risk, Types of Risk,
• Managing Risk, Sources and Measurement of Risk
• Slide: Part 1B
• Risk Evaluation and Prediction.
• Application of Statistical Techniques in Risk
Avoidance.
• Disaster Risk Management.
4Insurance & Risk management VJIM
• Risk-Averse
• Risk-Neutral
• Risk-Taker (Risk-Seeker, Risk-Lover)
5Insurance & Risk management VJIM
Measurement of Risk
• Statistical measures are used for the Risk
measurement based on historical data of
investment risk and volatility.
• The modern portfolio theory (MPT)is a standard
financial and academic methodology for assessing
the performance of a stock or a stock fund as
compared to its benchmark index.
• Risk Management Measurement Tools combines
qualitative and quantitative approaches
to measuring and managing risk.
6Insurance & Risk management VJIM
Risk identification/measurement tools
• Risk Management Measurement Tools
combines qualitative and quantitative
approaches to measuring and managing risk.
• Identify the loss exposure as in pure risk
1. Exposure check list
2. Financial statement analysis
3. Flow charts of the process
4. Contract Analysis-
5. Liability analysis
6. Onsite inspections
7. Statistical analysis of historical data
7Insurance & Risk management VJIM
Risk Evaluation
Criteria
• Frequency of the loss/ damage- lightening
• Maximum possible losses- partial/complete
8Insurance & Risk management VJIM
Risk Evaluation and Prediction
• Risk mapping / risk profiling
-Arrange the possible risk in matrix: Frequency
& Severity
-Analysis insurance cover for each
-Evaluvate the uncovered risk
9Insurance & Risk management VJIM
Statistical models
• Probability: 0-1
• Probability distribution study
• Measure of Center tendency: ẋ,
• Expected value of loss: Σ(amt x Probability)
• Median/ mode analysis
• Variance and SD (σ)
• Risk study: Coefficient study(%)
10Insurance & Risk management VJIM
calculate
• SJR computer Ltd has experienced the
following numbers of losses(in 000) in the past
10yrs: 3, 4,3,3,1,0,2,2,3,3. Calculate the mean,
median, mode, Variance, SD, coefficient of
variance for this loss due to monsoon.
11Insurance & Risk management VJIM
Probability distribution
• Empirical prob distribution
• Theoretical prob distribution: binomial, normal,
poisson
• Binomial distribution ( probability of x events in n possible times)
12Insurance & Risk management VJIM
13Insurance & Risk management VJIM
Normal distribution
• The large observations exhibit Center limit
theory- normal distribution
• SD and mean will enable the analysis
• Loss on fire in furniture manufacturing firm:
Max loss 1000L, Mean- 500L, SD- 150L, n-500
14Insurance & Risk management VJIM
15Insurance & Risk management VJIM
Inference..
• 68% - 1 σ
• 95% - 2 σ
• 99% - 3 σ
16Insurance & Risk management VJIM
Poisson Distribution
17Insurance & Risk management VJIM
Assignment problems
Insurance & Risk management VJIM 18
• The mean λ of P distribution is its variance, so
σ=√ λ
• Best tool to calculate probability for more than
50 exposures, p =0.1 or less
• It is used, If less 50, but with multiple exposure
• Other: Gama, Log normal, Negative Binomial,
pareto
19Insurance & Risk management VJIM
• Number of trucks-10; Probability of accidents=
p=0.1. Calculate the probability of 3 losses.
(0,1,2,3,4)
Expected loss frequency, λ=.01x10=1.0
Probability of 3 loss= 1-( probability of 1+2+3)
20Insurance & Risk management VJIM
http://www.intmath.com/counting-probability/13-poisson-probability-
distribution.php
21Insurance & Risk management VJIM
Integrated Risk measures- VAR
1. Value at Risk- VAR. identify risk at various
probability levels. by banks
• VAR provides numerical statement of max
expected loss at a time and its probability.
• Correlate the categories of risk
2.Risk adjusted return on capital (RAROC)
22Insurance & Risk management VJIM
Application of Statistical Techniques in Risk
Avoidance -ch8
-Risk avoidance is the elimination of hazards, activities
and exposures that can negatively affect an
organization's assets.
-Whereas risk management aims to control the
damages and financial consequences of threatening
events
-Risk avoidance seeks to avoid compromising events
entirely.
23Insurance & Risk management VJIM
Techniques in Risk Avoidance
– Avoid risks if possible:
– Implement appropriate loss control (risk
reduction) measures
Risk retention + transfer to insurance
– Select the optimal mix of risk retention and risk
transfer
24Insurance & Risk management VJIM
25
Avoid Risks if Possible
• Risks that can be eliminated without an adverse
effect on the goals of an individual or business
probably should be avoided
-Property granted at township/at to CRY- sell or
maintain the risk and return…
• Without a systematic identification of pure risk
exposures
– Some risks that easily could be avoided may
inadvertently be retained
Insurance & Risk management VJIM
26
Loss Control Measures
• For risks that a business or individual cannot or
does not wish to avoid
– Consideration should be given to available loss
control measures
• The costs and benefits of loss control
alternatives
– Should recognize that loss control will always be
used in conjunction with either risk retention or risk
transfer
• The selection between risk retention and risk
transfer as the optimal risk management
technique may change after loss control
expenditures are made
Insurance & Risk management VJIM
27
Analyzing Loss Control Decisions
• Capital budgeting techniques from finance and
accounting can be applied to risk management
decisions regarding loss control
• For example, Cole Department Store has been
experiencing substantial shoplifting losses and
occasional vandalism to its building
– The company is considering hiring 24-hour security guards
to decrease the frequency and severity of these losses
• Its estimated annual cost of the protection is $60,000
– Covers salaries and employee benefits for the guards
– Cole estimates that the presence of security guards will
decrease shoplifting losses by $30,000 and vandalism
losses by $20,000
• Additionally its insurance premiums are expected to decrease by
$5,000
– Should Cole hire the guards?
Insurance & Risk management VJIM
28
Analyzing Loss Control Decisions
• After examining only the financial
considerations
– Since the estimated $55,000 in savings is less than
the estimated $60,000 cost of hiring the guards
• The firm should not hire the guards
• However the company should consider
whether there are any additional relevant
factors that may have been overlooked
– For instance, will the presence of the security
guards make employees feel safer?
– Will the firm be able to hire better employees?
– Will customer relations be enhanced by the
presence of a guard?
Insurance & Risk management VJIM
29
Analyzing Loss Control Decisions
• In the Cole Department Store example all the
benefits and costs were expected to happen in
the same year
• When a longer period of time is involved the
calculations become more complicated
Insurance & Risk management VJIM
30
Optimal Mix of Risk Retention and Risk Transfer
• As stated, loss control decisions should be made as
part of an overall risk management plan
– It considers the techniques of risk retention and risk
transfer
• Often both of these techniques will be used
– The relevant question becomes
» What is the appropriate mix between these two techniques?
Insurance & Risk management VJIM
31
General Guidelines
• As a rule, risk retention is optimal for losses that
have a low expected severity
– With the rule becoming especially appropriate
when expected frequency is high
• Another general guideline applies to risks that have
a low expected frequency but a high potential
severity
– In this situation, risk transfer is often the optimal
choice
• When losses have both high expected severity and
high expected frequency
– It is likely that risk transfer, risk retention, and loss
control all will need to be used in varying degrees
• What constitutes “high” and “low” loss frequency
and severity in applying the preceding guidelinesInsurance & Risk management VJIM
32
Guidelines for Using Different Risk Mgt Techniques
Insurance & Risk management VJIM
33
Selecting Retention Amounts
• In many situations both risk retention and risk transfer will
be used in varying degrees
– It is important to determine the appropriate mix of
these two risk management techniques
• Both capital budgeting methods and statistical procedures
may be used in selecting an appropriate retention level
– With insurance purchased for losses in excess of that
level
• But because the price of insurance does not necessarily
vary proportionately with different levels of retention
– The appropriate mix between retention and transfer is
not an exact science
Insurance & Risk management VJIM
34
The Deductible Decision
• Selecting a particular deductible level is one way of
mixing risk retention and risk transfer
• Deductibles help lower the cost of insurance as well
as increase its availability
• Deductibles may also make management more loss
conscious
– Because a firm must absorb losses within the deductible
level
• However, as a general rule, risk managers do not
accept a deductible unless
– The firm can afford the associated losses
– Sufficient premiums savings will result
Insurance & Risk management VJIM
35
The Deductible Decision
• Hall Shoe Corporation operates 100 shoe stores in
100 cities
• All stores
– Are located in suburban shopping centers
– Have similar construction characteristics
– Have the same fire rating
– Have a value of $150,000
• Table below shows the firm’s losses for the past
twelve months
– Are typical of its loss experience during the past several
years
Insurance & Risk management VJIM
36
Table 8-3: Hall Shoe Corporation’s Fire
Losses
Insurance & Risk management VJIM
37
The Deductible Decision
• From Table 8-3 Hall Shoe’s risk manager can determine that
– The mean loss was $8,000
– The median loss was $2,500
– The standard deviation is about $11,000
– The loss frequency is five fires per year per 100 stores
• The firm is willing to retain no more than $10,000 in fire
losses during the year
– In effect, it wants to have an aggregate deductible equal
to $10,000
• The risk manager must determine the size of the per-
occurrence deductible that should be selected in order to
absorb no more than $10,000 in losses during the year
Insurance & Risk management VJIM
38
The Deductible Decision
• The firm has more than 50 loss exposures
• The probability of loss is less than 10%
–These two characteristics indicate that the
Poisson distribution may be suitable to use in
simulating losses
• In this case because the mean is distorted by the
$30,000 loss
– The median is the better measure of central tendency
Insurance & Risk management VJIM
39
The Deductible Decision
• Using the Poisson distribution and an average loss
frequency of five per year
– The probability of losses can be computed as shown in
Table 8-4
• For example, the probability of no losses at all would be
– (50e-5) ÷ 1 = 0.0067
• Therefore the probability of one or more losses is one minus
0.0067, or 0.9933
• If Hall Shoe Corporation chooses a deductible of $1,000 per
occurrence there is a
– 0.0318 chance that its losses will equal or be greater
than $10,000
– 0.0681 chance that the losses will equal or be greater
than $9,000, etc.
Insurance & Risk management VJIM
40
Table 8-4: Probability of Losses Using a Poisson
Distribution with m = 5
Insurance & Risk management VJIM
41
The Self-Insurance Decision
• The possibility of self-insurance is another way of mixing
risk retention and risk transfer
• The same statistical techniques used to select deductibles
can be used in choosing a retention level for a self-
insurance program
• The cash flow advantage of funds set aside in a reserve
fund is an additional factor that must be considered in
assessing value of self-insurance
– Because losses are not always paid out in the year in
which the event producing them occurs
• A company has the use of self-insurance funds for varying periods
– May earn interest on them until such a time as the losses are actually
paid
Insurance & Risk management VJIM
42
The Self-Insurance Decision
• In assessing the financial aspects of a self-insurance
program
– The value of operating funds to the firm must also be
considered
• If the monies in the reserve fund are invested in a
liquid form that can be readily converted to cash
– The firm may experience some loss because the funds
might have been more profitably used in the business as
working capital
• Known as an opportunity cost of funds
Insurance & Risk management VJIM
43
The Self-Insurance Decision
• Even though it may be clear that a firm can
save money in the long run with self-insurance
– Management may prefer stable, predictable
insurance premiums each year
• Some companies prefer to avoid the details of
managing self-insurance programs
– Rather, focusing on their main operations
Insurance & Risk management VJIM
44
The Self-Insurance Decision
• The following conditions are suggestive of the types
of situations where self-insurance is both possible
and feasible
– The firm should have a sufficient number of objects so
situated that they’re not subject to simultaneous
destruction
• The objects should also be reasonably similar in nature
and value so that the calculations of probable losses will
be accurate within a narrow range
– The firm must have accurate records or have access to
satisfactory statistics to enable it to make good estimates
of expected losses
Insurance & Risk management VJIM
45
The Self-Insurance Decision
• The firm must make arrangements for administering
the plan and managing the self-insurance fund
– Someone must pay claims, inspect exposures, implement
appropriate loss control measures, keep necessary records,
and take care of the many administrative details
• It may be possible to contract for these services to be
done by an independent third-party administrator
• The general financial condition of the firm should be
satisfactory
– Firm’s management must be willing and able to deal with
large and unusual losses
Insurance & Risk management VJIM
Disaster Risk Management
• Disaster Risk Reduction (DRR) aims to reduce the
damage caused by natural hazards like
earthquakes, floods, droughts and cyclones,
through an ethic of prevention. Disasters often
follow natural hazards.
Ref: https://www.unisdr.org/we/inform/terminology
46Insurance & Risk management VJIM
Millions
of inhabitants
are at risk.
In the past 20 years,
31,835 Filipinos have
reported been killed
and 94,369,462 people
have been affected by
disasters.
47Insurance & Risk management VJIM
Disaster Risk Management
Framework
Risk
Assessment
Risk
Reduction
Risk
Financing
Disaster
Preparedness
and Recovery
48Insurance & Risk management VJIM
49Insurance & Risk management VJIM
50Insurance & Risk management VJIM
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Insurance& risk management modeule 1 part1 b

  • 1. INSURANCE & RISK MANAGEMENT , Jinuachan Vadakkemulanjanal Vimal Jyothi Institute of Management & Research, Chemperi PO, Kannur Dr , Kerala-670632 www.vjim.ac.in jinuachan@gmail.com; +91-9447373415; 04602213399; 2212240 SEMESTER III- FINANCE-Elective Course MBA3E33 Part 2 Down load the Part 1 before this slide of this module. Please do rate
  • 2. Plz Down load the Part 1 before this slide of this module. Please do rate or comment
  • 3. Course outcome Objective To develop an understanding among students about identifying analyzing and managing various types of risk. Besides the students will be in a position to understand principles of insurance and its usefulness in business Pedagogy Lectures, Assignments, Practical exercises, Case discussion and Seminars etc Elective Course 4 Credits * 4 teaching hrs. * Per week 3Hrs. IAT & End Sem. Exam * Marks 20+80 3Insurance & Risk management VJIM
  • 4. Module-1 Slide: Part 1A Concept of Risk, Types of Risk, • Managing Risk, Sources and Measurement of Risk • Slide: Part 1B • Risk Evaluation and Prediction. • Application of Statistical Techniques in Risk Avoidance. • Disaster Risk Management. 4Insurance & Risk management VJIM
  • 5. • Risk-Averse • Risk-Neutral • Risk-Taker (Risk-Seeker, Risk-Lover) 5Insurance & Risk management VJIM
  • 6. Measurement of Risk • Statistical measures are used for the Risk measurement based on historical data of investment risk and volatility. • The modern portfolio theory (MPT)is a standard financial and academic methodology for assessing the performance of a stock or a stock fund as compared to its benchmark index. • Risk Management Measurement Tools combines qualitative and quantitative approaches to measuring and managing risk. 6Insurance & Risk management VJIM
  • 7. Risk identification/measurement tools • Risk Management Measurement Tools combines qualitative and quantitative approaches to measuring and managing risk. • Identify the loss exposure as in pure risk 1. Exposure check list 2. Financial statement analysis 3. Flow charts of the process 4. Contract Analysis- 5. Liability analysis 6. Onsite inspections 7. Statistical analysis of historical data 7Insurance & Risk management VJIM
  • 8. Risk Evaluation Criteria • Frequency of the loss/ damage- lightening • Maximum possible losses- partial/complete 8Insurance & Risk management VJIM
  • 9. Risk Evaluation and Prediction • Risk mapping / risk profiling -Arrange the possible risk in matrix: Frequency & Severity -Analysis insurance cover for each -Evaluvate the uncovered risk 9Insurance & Risk management VJIM
  • 10. Statistical models • Probability: 0-1 • Probability distribution study • Measure of Center tendency: ẋ, • Expected value of loss: Σ(amt x Probability) • Median/ mode analysis • Variance and SD (σ) • Risk study: Coefficient study(%) 10Insurance & Risk management VJIM
  • 11. calculate • SJR computer Ltd has experienced the following numbers of losses(in 000) in the past 10yrs: 3, 4,3,3,1,0,2,2,3,3. Calculate the mean, median, mode, Variance, SD, coefficient of variance for this loss due to monsoon. 11Insurance & Risk management VJIM
  • 12. Probability distribution • Empirical prob distribution • Theoretical prob distribution: binomial, normal, poisson • Binomial distribution ( probability of x events in n possible times) 12Insurance & Risk management VJIM
  • 13. 13Insurance & Risk management VJIM
  • 14. Normal distribution • The large observations exhibit Center limit theory- normal distribution • SD and mean will enable the analysis • Loss on fire in furniture manufacturing firm: Max loss 1000L, Mean- 500L, SD- 150L, n-500 14Insurance & Risk management VJIM
  • 15. 15Insurance & Risk management VJIM
  • 16. Inference.. • 68% - 1 σ • 95% - 2 σ • 99% - 3 σ 16Insurance & Risk management VJIM
  • 17. Poisson Distribution 17Insurance & Risk management VJIM
  • 18. Assignment problems Insurance & Risk management VJIM 18
  • 19. • The mean λ of P distribution is its variance, so σ=√ λ • Best tool to calculate probability for more than 50 exposures, p =0.1 or less • It is used, If less 50, but with multiple exposure • Other: Gama, Log normal, Negative Binomial, pareto 19Insurance & Risk management VJIM
  • 20. • Number of trucks-10; Probability of accidents= p=0.1. Calculate the probability of 3 losses. (0,1,2,3,4) Expected loss frequency, λ=.01x10=1.0 Probability of 3 loss= 1-( probability of 1+2+3) 20Insurance & Risk management VJIM
  • 22. Integrated Risk measures- VAR 1. Value at Risk- VAR. identify risk at various probability levels. by banks • VAR provides numerical statement of max expected loss at a time and its probability. • Correlate the categories of risk 2.Risk adjusted return on capital (RAROC) 22Insurance & Risk management VJIM
  • 23. Application of Statistical Techniques in Risk Avoidance -ch8 -Risk avoidance is the elimination of hazards, activities and exposures that can negatively affect an organization's assets. -Whereas risk management aims to control the damages and financial consequences of threatening events -Risk avoidance seeks to avoid compromising events entirely. 23Insurance & Risk management VJIM
  • 24. Techniques in Risk Avoidance – Avoid risks if possible: – Implement appropriate loss control (risk reduction) measures Risk retention + transfer to insurance – Select the optimal mix of risk retention and risk transfer 24Insurance & Risk management VJIM
  • 25. 25 Avoid Risks if Possible • Risks that can be eliminated without an adverse effect on the goals of an individual or business probably should be avoided -Property granted at township/at to CRY- sell or maintain the risk and return… • Without a systematic identification of pure risk exposures – Some risks that easily could be avoided may inadvertently be retained Insurance & Risk management VJIM
  • 26. 26 Loss Control Measures • For risks that a business or individual cannot or does not wish to avoid – Consideration should be given to available loss control measures • The costs and benefits of loss control alternatives – Should recognize that loss control will always be used in conjunction with either risk retention or risk transfer • The selection between risk retention and risk transfer as the optimal risk management technique may change after loss control expenditures are made Insurance & Risk management VJIM
  • 27. 27 Analyzing Loss Control Decisions • Capital budgeting techniques from finance and accounting can be applied to risk management decisions regarding loss control • For example, Cole Department Store has been experiencing substantial shoplifting losses and occasional vandalism to its building – The company is considering hiring 24-hour security guards to decrease the frequency and severity of these losses • Its estimated annual cost of the protection is $60,000 – Covers salaries and employee benefits for the guards – Cole estimates that the presence of security guards will decrease shoplifting losses by $30,000 and vandalism losses by $20,000 • Additionally its insurance premiums are expected to decrease by $5,000 – Should Cole hire the guards? Insurance & Risk management VJIM
  • 28. 28 Analyzing Loss Control Decisions • After examining only the financial considerations – Since the estimated $55,000 in savings is less than the estimated $60,000 cost of hiring the guards • The firm should not hire the guards • However the company should consider whether there are any additional relevant factors that may have been overlooked – For instance, will the presence of the security guards make employees feel safer? – Will the firm be able to hire better employees? – Will customer relations be enhanced by the presence of a guard? Insurance & Risk management VJIM
  • 29. 29 Analyzing Loss Control Decisions • In the Cole Department Store example all the benefits and costs were expected to happen in the same year • When a longer period of time is involved the calculations become more complicated Insurance & Risk management VJIM
  • 30. 30 Optimal Mix of Risk Retention and Risk Transfer • As stated, loss control decisions should be made as part of an overall risk management plan – It considers the techniques of risk retention and risk transfer • Often both of these techniques will be used – The relevant question becomes » What is the appropriate mix between these two techniques? Insurance & Risk management VJIM
  • 31. 31 General Guidelines • As a rule, risk retention is optimal for losses that have a low expected severity – With the rule becoming especially appropriate when expected frequency is high • Another general guideline applies to risks that have a low expected frequency but a high potential severity – In this situation, risk transfer is often the optimal choice • When losses have both high expected severity and high expected frequency – It is likely that risk transfer, risk retention, and loss control all will need to be used in varying degrees • What constitutes “high” and “low” loss frequency and severity in applying the preceding guidelinesInsurance & Risk management VJIM
  • 32. 32 Guidelines for Using Different Risk Mgt Techniques Insurance & Risk management VJIM
  • 33. 33 Selecting Retention Amounts • In many situations both risk retention and risk transfer will be used in varying degrees – It is important to determine the appropriate mix of these two risk management techniques • Both capital budgeting methods and statistical procedures may be used in selecting an appropriate retention level – With insurance purchased for losses in excess of that level • But because the price of insurance does not necessarily vary proportionately with different levels of retention – The appropriate mix between retention and transfer is not an exact science Insurance & Risk management VJIM
  • 34. 34 The Deductible Decision • Selecting a particular deductible level is one way of mixing risk retention and risk transfer • Deductibles help lower the cost of insurance as well as increase its availability • Deductibles may also make management more loss conscious – Because a firm must absorb losses within the deductible level • However, as a general rule, risk managers do not accept a deductible unless – The firm can afford the associated losses – Sufficient premiums savings will result Insurance & Risk management VJIM
  • 35. 35 The Deductible Decision • Hall Shoe Corporation operates 100 shoe stores in 100 cities • All stores – Are located in suburban shopping centers – Have similar construction characteristics – Have the same fire rating – Have a value of $150,000 • Table below shows the firm’s losses for the past twelve months – Are typical of its loss experience during the past several years Insurance & Risk management VJIM
  • 36. 36 Table 8-3: Hall Shoe Corporation’s Fire Losses Insurance & Risk management VJIM
  • 37. 37 The Deductible Decision • From Table 8-3 Hall Shoe’s risk manager can determine that – The mean loss was $8,000 – The median loss was $2,500 – The standard deviation is about $11,000 – The loss frequency is five fires per year per 100 stores • The firm is willing to retain no more than $10,000 in fire losses during the year – In effect, it wants to have an aggregate deductible equal to $10,000 • The risk manager must determine the size of the per- occurrence deductible that should be selected in order to absorb no more than $10,000 in losses during the year Insurance & Risk management VJIM
  • 38. 38 The Deductible Decision • The firm has more than 50 loss exposures • The probability of loss is less than 10% –These two characteristics indicate that the Poisson distribution may be suitable to use in simulating losses • In this case because the mean is distorted by the $30,000 loss – The median is the better measure of central tendency Insurance & Risk management VJIM
  • 39. 39 The Deductible Decision • Using the Poisson distribution and an average loss frequency of five per year – The probability of losses can be computed as shown in Table 8-4 • For example, the probability of no losses at all would be – (50e-5) ÷ 1 = 0.0067 • Therefore the probability of one or more losses is one minus 0.0067, or 0.9933 • If Hall Shoe Corporation chooses a deductible of $1,000 per occurrence there is a – 0.0318 chance that its losses will equal or be greater than $10,000 – 0.0681 chance that the losses will equal or be greater than $9,000, etc. Insurance & Risk management VJIM
  • 40. 40 Table 8-4: Probability of Losses Using a Poisson Distribution with m = 5 Insurance & Risk management VJIM
  • 41. 41 The Self-Insurance Decision • The possibility of self-insurance is another way of mixing risk retention and risk transfer • The same statistical techniques used to select deductibles can be used in choosing a retention level for a self- insurance program • The cash flow advantage of funds set aside in a reserve fund is an additional factor that must be considered in assessing value of self-insurance – Because losses are not always paid out in the year in which the event producing them occurs • A company has the use of self-insurance funds for varying periods – May earn interest on them until such a time as the losses are actually paid Insurance & Risk management VJIM
  • 42. 42 The Self-Insurance Decision • In assessing the financial aspects of a self-insurance program – The value of operating funds to the firm must also be considered • If the monies in the reserve fund are invested in a liquid form that can be readily converted to cash – The firm may experience some loss because the funds might have been more profitably used in the business as working capital • Known as an opportunity cost of funds Insurance & Risk management VJIM
  • 43. 43 The Self-Insurance Decision • Even though it may be clear that a firm can save money in the long run with self-insurance – Management may prefer stable, predictable insurance premiums each year • Some companies prefer to avoid the details of managing self-insurance programs – Rather, focusing on their main operations Insurance & Risk management VJIM
  • 44. 44 The Self-Insurance Decision • The following conditions are suggestive of the types of situations where self-insurance is both possible and feasible – The firm should have a sufficient number of objects so situated that they’re not subject to simultaneous destruction • The objects should also be reasonably similar in nature and value so that the calculations of probable losses will be accurate within a narrow range – The firm must have accurate records or have access to satisfactory statistics to enable it to make good estimates of expected losses Insurance & Risk management VJIM
  • 45. 45 The Self-Insurance Decision • The firm must make arrangements for administering the plan and managing the self-insurance fund – Someone must pay claims, inspect exposures, implement appropriate loss control measures, keep necessary records, and take care of the many administrative details • It may be possible to contract for these services to be done by an independent third-party administrator • The general financial condition of the firm should be satisfactory – Firm’s management must be willing and able to deal with large and unusual losses Insurance & Risk management VJIM
  • 46. Disaster Risk Management • Disaster Risk Reduction (DRR) aims to reduce the damage caused by natural hazards like earthquakes, floods, droughts and cyclones, through an ethic of prevention. Disasters often follow natural hazards. Ref: https://www.unisdr.org/we/inform/terminology 46Insurance & Risk management VJIM
  • 47. Millions of inhabitants are at risk. In the past 20 years, 31,835 Filipinos have reported been killed and 94,369,462 people have been affected by disasters. 47Insurance & Risk management VJIM
  • 49. 49Insurance & Risk management VJIM
  • 50. 50Insurance & Risk management VJIM
  • 51. Down load the Part 1 before this slide of this module. Please do rate or comment.

Editor's Notes

  1. A risk profile is an evaluation of an individual or organization's willingness to take risks, as well as the threats to which an organization is exposed. A risk profile is important for determining a proper investment asset allocation for a portfolio.
  2. The socio-economic and political conditions of the country makes Filipinos very vulnerable to disasters. This has placed the Philippines as one of the world’s most disaster prone nations … and climate change can only exacerbate all of these.