Escolar Documentos
Profissional Documentos
Cultura Documentos
Chapter4
AdvancedTopicsinRiskManagement
Teaching Note
Someinstructorswantedalittlemoreextensivetreatmentofriskmanagementinthetext,focusingmore
onbusinessriskmanagement.Thischapterwasaddedtoaddressthisconcern.Asmanyinstructorsteach
thisasapersonalriskmanagementcourse,thischaptercanbeskippedwithoutlossofcontinuity.
Thechapterisorganizedasacollectionoftopics.Thefollowingtopicsarecovered:(1)thechanging
scopeofriskmanagement,(2)insurancemarketdynamics,(3)lossforecasting,(4)financialanalysisin
riskmanagementdecisionmaking,and(5)riskmanagementtools.Instructorsdesiringsomemore
quantitativeworkmaycovertheappendixattheendofthechapter.
Lecture Outline
I. TheChangingScopeofRiskManagement
A. FinancialRiskManagement
B. EnterpriseRiskManagement
II. InsuranceMarketDynamics
A. TheUnderwritingCycle
B. ConsolidationintheInsuranceIndustry
C. CapitalMarketRiskFinancingAlternatives
III. LossForecasting
A. ProbabilityAnalysis
B. RegressionAnalysis
C. ForecastingwithLossDistributions
IV. FinancialAnalysisinRiskManagementDecisionMaking
A. TheTimeValueofMoney
B. FinancialAnalysisApplications
2011PearsonEducation,Inc.PublishingasPrenticeHall
21RejdaPrinciplesofRiskManagementandInsurance,EleventhEdition
V. OtherRiskManagementTools
A. RiskManagementInformationSystems(RMIS)
B. RiskManagementIntranets
C. RiskMaps
D. ValueatRisk(VAR)Analysis
E. CatastropheModeling
Y(#ofderailments)=2.31+0.22(640)
=2.31+14.08
=16.39
2011PearsonEducation,Inc.PublishingasPrenticeHall
Chapter4AdvancedTopicsinRiskManagement22
2. Traditionalriskmanagementwaslimitedinscopetoproperty,liability,andpersonnelrelatedloss
exposures.Enterpriseriskmanagementisamuchbroaderconcept,encompassingtraditionalrisk
management.Inadditiontoconsideringproperty,liability,andpersonnelexposures,enterpriserisk
managementconsidersspeculativerisks,strategicrisks,andoperationalrisks.
3. Theunderwritingcyclereferstothetendencyforcommercialpropertyandliabilityinsurancemarkets
tofluctuatebetweenperiodsoftightunderwritingwithhighinsurancepremiumsandperiodsofloose
underwritingwithlowinsurancepremiums.Whenthepropertyandliabilityinsuranceindustryisina
strongsurplusposition,insurerscanlowerpremiumsandloosenunderwritingstandardstocompete
withotherinsurers.Ascompetitionincreases,thesurplusisdepletedthroughunderwritinglossesthat
developbecauseoflowpremiumsandlessstringentunderwriting.Ifinvestmentincomeisnot
availabletooffsettheunderwritinglosses,atsomepointpremiumsmustbeincreasedandunderwriting
standardstightened.Higherpremiumsandstricterunderwritinghelptorestoretheinsurerto
profitability.Asprofitabilityreturns,thedepletedsurplusisrestored,makingitpossibleforinsurers
toenterintocompetitionwithlowerpremiumsandlessstrictunderwriting.
Themarketishardwhenpremiumsarehighandunderwritingstandardsaretight.Themarketis
softwhenpremiumsarelowandunderwritingstandardsareloose.
4. Consolidationintheinsuranceindustryreferstothecombiningofinsurancebusinessorganizations
throughmergersandacquisitions.Threetypesofconsolidationhavebeenoccurring.First,insurance
companieshavebeenmergingwithoracquiringotherinsurancecompanies.Thecombinationof
St.PaulInsurancewithTravelersInsuranceisanexcellentexample,asistheacquisitionofSafeco
InsurancebyLibertyMutualInsuranceCompany.Second,insurancebrokerageshavebeenmerging
withoracquiringotherinsurancebrokerages(MarshacquiredSedgwick,forexample).Finally,there
hasbeencrossindustryconsolidation.Crossindustryconsolidationoccurswhenacompanyinone
financialservicesareamergeswithoracquiresacompanyinanotherfinancialservicesarea.For
example,abankmayacquireaninsurancecompanyoraninsurancecompanymaypurchasean
investment(mutualfund)company.
5. Securitizationtransfersinsurablerisktothecapitalmarketsthroughthecreationofafinancial
instrument,suchasacatastrophebond.Priortosecuritization,thecapacityoftheinsuranceindustry
waslimitedtothecapacityofinsurersandreinsurersoperatingintheindustry.Risksecuritization
providesanavenuethroughwhichinsurableriskisspreadtocapitalmarketparticipants
(e.g.,bondholders).
6 (a) Lossforecastingisnecessarytoenabletheriskmanagertomakeaninformeddecisionabout
whethertoretainortransferlossexposures.Theriskmanagerwillbeunabletoevaluatean
insurancecoveragebidunlessheorshehassomelevelofconfidenceaboutthemagnitudeof
expectedlossesandthereliabilityoftheestimate.Basedontheforecast,theriskmanagermay
believethataninsurancebidistoohighandoptforretention,orthattheinsurancebidislow
relativetotheexpectedlosses,andoptforinsurance.
2011PearsonEducation,Inc.PublishingasPrenticeHall
23RejdaPrinciplesofRiskManagementandInsurance,EleventhEdition
(b) Theriskmanagermayuseseveraltechniquestoforecastlosses.Probabilityanalysis,regression
analysis,andforecastingthroughlossdistributionsmaybeemployed.
2011PearsonEducation,Inc.PublishingasPrenticeHall
Chapter4AdvancedTopicsinRiskManagement24
7. Usingpastlossesalonetopredictfuturelossesisnotwise.Whilepastlossesmayhavesomebearing
uponfuturelosses,underlyingconditionsmayhavechanged.Thecompanymayhavesoldoffor
acquirednewoperations,expandedintonewmarkets,oralteredproductionprocesses.Theremaybe
otherexposuresthatproducelossesthisyearthatdidnotproducelossesinthepast.Whilepastloss
datamaybehelpful,additionalinformationshouldbeconsidered.
8. Timevalueofmoneyanalysisisemployedinriskmanagementdecisionmakingtoaccountforthe
interestearningcapacityofmoney.Thesameamountofmoneytobereceivedorpaidindifferent
timeperiodsisofdifferentvalueintermsoftodaysdollars,oncetheinterestearningcapacityofthe
moneyisconsidered.Failuretoconsidertheinterestearningcapacityofmoneymayleadtobadrisk
managementdecisions.
9. Thefuturecashflowsthataprojectwillgenerateareestimatedinthecapitalbudgetingprocess.In
additiontothecashbenefits(reducedcostsandincreasedrevenues),somevaluesthataredifficultto
quantifymaybeconsidered.Forexample,alosscontrolinvestmentmayresultinfewerlostwork
days,improvedmoraleofemployees,reducedabsenteeism,reducedpainandsuffering,animproved
publicimageofthecompany,andlessdowntimewhenareplacementworkermustbetrainedto
substituteforaninjuredworker.Theseitemsaredifficulttoquantifyincapitalbudgeting.
2. Propertyandliabilityinsurancemarketsfluctuate.Sometimespremiumsarehighandunderwriting
standardsaretight;atothertimes,premiumsarelowandunderwritingstandardsareloose.Inthis
case,selfinsurancewasprobablyusedthefirstyearbecausetheriskmanagerbelievedthattherisk
wasbesthandledinthiswayasopposedtopurchasinginsurance.Thechangeinthesecondyear
likelyreflectsadownturnininsuranceprices,makingcommercialinsurancethemostcosteffective
alternative.
2011PearsonEducation,Inc.PublishingasPrenticeHall
25RejdaPrinciplesofRiskManagementandInsurance,EleventhEdition
3. Therearehundredsofinsurancecompaniesoperatinginmoststates.Ifseveralofthesecompanies
merge,orifoneisacquiredbyanotherinsurer,themarketplaceremainsverycompetive.Broker
consolidationleavesfewerlargerplayersinthemarket.Whensomelargebrokeragesmerge,thereare
fewerlargebrokers(e.g.,MarshandAon)forariskmanagertocalluponwhenputtinganinsurance
programoutforbids.Forexample,ariskmanagerwasonceabletogetcompetitivebidsfrom
Johnson&Higgins(J&H),Marsh,andSedgwick.However,MarshacquiredJ&HandSedgwick.
Oftensmallernationalbrokeragesorregionalbrokeragesmustbeemployedinacompetitivebidding
process.
4. (a) Ignoringthetimevalueofmoneyinriskmanagementdecisionmakingmayleadtowrong
decisionsoratleastlessthanoptimaldecisions.Theresultisespeciallytrueincapitalbudgeting
whereinvestmentexpendituresareusuallymadeupfront,butthebenefitsoftheprojectsarenot
realizeduntilthefuture.Ifthefuturecashflowswerenotadjustedfortimevalueofmoney
considerations,thevalueofthefuturecashflowswouldbeoverstated.Projectsthatare
unacceptablewhenthetimevalueofmoneyisconsideredmayappeartobegoodprojectswhen
thetimevalueofmoneyisignored.
(b) TheNPVofaprojectisthevalueaddedtothebusinessiftheprojectisundertaken.Asthenet
presentvalueiscalculatedusingtheorganizationsrequiredrateofreturntodiscountthefuture
cashflowsbacktopresentvalue,projectsthathaveapositivenetpresentvalueprovidearateof
returnhigherthantheorganizationsminimumacceptablereturn.Assuch,theNPVisthevalue
addedtotheorganizationbyundertakingtheproject.
5. Selfinsuringworkerscompensationisacommonpractice.Useofselfinsuranceincreasesduring
hardinsurancemarkets,aspremiumsarehigherandunderwritingstandardsaretighter.Giventhe
cyclicalnatureofthecommercialpropertyandliabilityinsurancemarket,theriskmanagermay
wanttopurchaseinsurancenextyearifworkerscompensationinsurancepremiumshavedropped
significantly.Asworkerscompensationisanexperienceratedcoverage,theriskmanagerwantsto
makesurethatifthisyearsclaimsexperienceisfavorable,theriskmanagerwillbeabletodocument
thesuperiorperformancetoinsuranceunderwritersandobtainalowerpremiumfromtheinsurer.
2011PearsonEducation,Inc.PublishingasPrenticeHall