Risk Management and Insurance: Perspectives in a Global Economy
1. Introduction to Risk Management and Insurance
Study Points
2
Study Points
▪ The importance of an international perspective
3
Study Points
▪ The importance of an international perspective
▪ Risk management and economic growth
4
Study Points
▪ The importance of an international perspective
▪ Risk management and economic growth
▪ The language of risk and insurance internationally
5
Study Points
▪ The importance of an international perspective
▪ Risk management and economic growth
▪ The language of risk and insurance internationally
▪ The environment for risk and insurance internationally
6
Risk
Risk and Economic Development (Figure 1.1)
Level of economic development
7
The Importance of an International Perspective
8
The Importance of an International Perspective
9
The Importance of an International Perspective
▪ Decisions about how to deal with some risky activities and
processes have become complex.
10
The Importance of an International Perspective
▪ Decisions about how to deal with some risky activities and
processes have become complex.
▪ The world is getting smaller…
11
The Importance of an International Perspective
▪ Decisions about how to deal with some risky activities and
processes have become complex.
▪ The world is getting smaller…
12
The Importance of an International Perspective
▪ Decisions about how to deal with some risky activities and
processes have become complex.
▪ The world is getting smaller…
▪ In most markets, a significant proportion of goods and
services competes directly or indirectly with those of other
countries.
13
The Importance of an International Perspective
▪ Decisions about how to deal with some risky activities and
processes have become complex.
▪ The world is getting smaller…
▪ In most markets, a significant proportion of goods and
services competes directly or indirectly with those of other
countries.
▪ The proportion of cross-border trade continues to grow
worldwide.
14
World Trade Volume Growth and GDP Growth
Source: WTO
15
The Importance of an International Perspective
16
The Importance of an International Perspective
▪ Foreign direct investment (FDI) becomes more and more
important.
17
The Importance of an International Perspective
▪ Foreign direct investment (FDI) becomes more and more
important.
▪ FDI inflows tend to grow at rates greater than those for
merchandise trade.
18
The Importance of an International Perspective
▪ Competitiveness is heightened as price differentiation
becomes a less feasible alternative to improved operating
efficiency.
19
The Importance of an International Perspective
▪ Competitiveness is heightened as price differentiation
becomes a less feasible alternative to improved operating
efficiency.
▪ Even firms which are not directly involved in international
activities are affected.
20
The Importance of an International Perspective
▪ In a global economy, the way risk is dealt with naturally
differs to suit each country’s
21
The Importance of an International Perspective
▪ In a global economy, the way risk is dealt with naturally
differs to suit each country’s
• socio-cultural,
22
The Importance of an International Perspective
▪ In a global economy, the way risk is dealt with naturally
differs to suit each country’s
• socio-cultural,
• demographic,
23
The Importance of an International Perspective
▪ In a global economy, the way risk is dealt with naturally
differs to suit each country’s
• socio-cultural,
• demographic,
• political and
24
The Importance of an International Perspective
▪ In a global economy, the way risk is dealt with naturally
differs to suit each country’s
• socio-cultural,
• demographic,
• political and
• economic
25
The Importance of an International Perspective
▪ In a global economy, the way risk is dealt with naturally
differs to suit each country’s
• socio-cultural,
• demographic,
• political and
• economic
circumstances.
26
Risk Management and Economic Growth
Growing Importance of Risk Management
▪ We observe a rise in the number of high-value (highly
protected) risks.
28
Growing Importance of Risk Management
▪ We observe a rise in the number of high-value (highly
protected) risks.
29
Growing Importance of Risk Management
▪ We observe a rise in the number of high-value (highly
protected) risks.
30
Growing Importance of Risk Management
▪ We observe a rise in the number of high-value (highly
protected) risks.
31
Growing Importance of Risk Management
▪ There is a tendency towards resource concentration.
32
Growing Importance of Risk Management
▪ There is a tendency towards resource concentration.
33
Growing Importance of Risk Management
34
Growing Importance of Risk Management
▪ Pollution as another externality has become a topical issue.
35
Growing Importance of Risk Management
▪ Pollution as another externality has become a topical issue.
36
Growing Importance of Risk Management
▪ Risk management has assumed greater importance as its
scope continues to expand.
37
Growing Importance of Risk Management
▪ Risk management has assumed greater importance as its
scope continues to expand.
▪ Today, it finds application in limiting and spreading (financial
and other) risks in business and in helping governments
resolve public policy issues.
38
Growing Importance of Risk Management
39
Role of Risk Management in Economic Growth
▪ Risk management may reduce long-term financial
variability and render firms more competitive.
40
Role of Risk Management in Economic Growth
▪ From a macroeconomic standpoint, risk management may
reduce the number of commercial and industrial
enterprises that would otherwise become insolvent.
41
Role of Risk Management in Economic Growth
▪ Via effective loss control measures, risk management may
reduce the frequency and severity of causes of
economic losses, such as work-related injuries and work
interruption.
42
Role of Risk Management in Economic Growth
▪ Risk management may reduce production costs, thus
making goods and services cheaper.
43
Defining Risk and Insurance
▪ International risk and international insurance commonly
refer to
44
Defining Risk and Insurance
▪ International risk and international insurance commonly
refer to
• unintended outcomes and
45
Defining Risk and Insurance
▪ International risk and international insurance commonly
refer to
• unintended outcomes and
• insurance transactions that
46
Defining Risk and Insurance
▪ International risk and international insurance commonly
refer to
• unintended outcomes and
• insurance transactions that
transcend or cross national boundaries.
47
Defining Risk and Insurance
▪ International risk and international insurance commonly
refer to
• unintended outcomes and
• insurance transactions that
transcend or cross national boundaries.
• International risk can stem from the consequences of international
business activities.
48
Defining Risk and Insurance
▪ International risk and international insurance commonly
refer to
• unintended outcomes and
• insurance transactions that
transcend or cross national boundaries.
• International risk can stem from the consequences of international
business activities.
49
Country Classifications – by State of Economic Development
▪ Developed market economies
50
Country Classifications – by State of Economic Development
▪ Developed market economies
▪ Developing economies
51
Country Classifications – by State of Economic Development
▪ Developed market economies
▪ Developing economies
▪ Centrally planned economies
52
Country Classifications – by State of Economic Development
▪ Developed market economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
53
Country Classifications – by State of Economic Development
▪ Developed market economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
• Newly industrialized economies
54
Country Classifications – by State of Economic Development
▪ Developed market economies
▪ Developing economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
• Newly industrialized economies
55
Country Classifications – by State of Economic Development
▪ Developed market economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
• Newly industrialized economies
▪ Developing economies
• Also known as underdeveloped
countries, undeveloped
countries, low- (or middle-)
income countries, the south
and the third world.
56
Country Classifications – by State of Economic Development
▪ Developed market economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
• Newly industrialized economies
▪ Developing economies
• Also known as underdeveloped
countries, undeveloped
countries, low- (or middle-)
income countries, the south
and the third world.
• Emerging markets
57
Country Classifications – by State of Economic Development
▪ Developed market economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
• Newly industrialized economies
▪ Developing economies
• Also known as underdeveloped
countries, undeveloped
countries, low- (or middle-)
income countries, the south
and the third world.
• Emerging markets
• Economies in transition
58
Country Classifications – by State of Economic Development
▪ Developed market economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
• Newly industrialized economies
▪ Developing economies
• Also known as underdeveloped
countries, undeveloped
countries, low- (or middle-)
income countries, the south
and the third world.
• Emerging markets
• Economies in transition
• Least developed countries
59
Country Classifications – by State of Economic Development
▪ Developed market economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
• Newly industrialized economies
▪ Developing economies
• Also known as underdeveloped
countries, undeveloped
countries, low- (or middle-)
income countries, the south
and the third world.
• Emerging markets
• Economies in transition
• Least developed countries
▪ Centrally planned economies
60
Country Classifications – by State of Economic Development
▪ Developed market economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
• Newly industrialized economies
▪ Developing economies
• Also known as underdeveloped
countries, undeveloped
countries, low- (or middle-)
income countries, the south
and the third world.
• Emerging markets
• Economies in transition
• Least developed countries
▪ Centrally planned economies
• Also known as planned
economies, communist
countries, and the second
world.
61
Country Classifications – by State of Economic Development
▪ Developed market economies
• Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
• Newly industrialized economies
▪ Developing economies
• Also known as underdeveloped
countries, undeveloped
countries, low- (or middle-)
income countries, the south
and the third world.
• Emerging markets
• Economies in transition
• Least developed countries
▪ Centrally planned economies
• Also known as planned
economies, communist
countries, and the second
world.
62
Distribution of GDP (PPP), Exports & Population (2018)
Exports of Goods and
Services
GDP
Advanced Economies
United States
Euro Area
Germany
France
Italy
Spain
Japan
United Kingdom
Canada
Other Advanced
Economies
Memorandum
Major Advanced
Economies
Number of Advanced
Economies Economies
39
100.0
37.2
19
27.9
7.9
5.4
4.3
3.4
10.1
5.5
3.3
40.8
15.2
11.4
3.2
2.2
1.8
1.4
4.1
2.2
1.4
Advanced
Economies
100.0
16.0
42.0
11.9
5.8
4.2
3.1
5.9
5.4
3.5
World
Population
63.0
10.1
26.5
7.5
3.6
2.7
2.0
3.7
3.4
2.2
Advanced
Economies
100.0
30.6
31.7
7.8
6.1
5.7
4.3
11.8
6.2
3.5
World
World
14.3
4.4
4.5
1.1
0.9
0.8
0.6
1.7
0.9
0.5
16
15.9
6.5
27.2
17.1
16.1
2.3
7
73.7
30.1
52.7
33.2
71.6
10.2
Source: IMF
63
Country Classifications by Membership
64
Country Classifications by Membership
International Organizations
65
Country Classifications by Membership
International Organizations
▪
United Nations
66
Country Classifications by Membership
International Organizations
▪
▪
United Nations
International Monetary Fund
67
Country Classifications by Membership
International Organizations
▪
▪
▪
United Nations
International Monetary Fund
World Bank
68
Country Classifications by Membership
International Organizations
▪
▪
▪
▪
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
69
Country Classifications by Membership
International Organizations
▪
▪
▪
▪
▪
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
World Health Organization (WHO)
70
Country Classifications by Membership
International Organizations
▪
▪
▪
▪
▪
Regional Organizations
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
World Health Organization (WHO)
71
Country Classifications by Membership
International Organizations
Regional Organizations
▪
▪
▪
▪
▪
▪
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
World Health Organization (WHO)
Organization for Economic Cooperation
and Development
72
Country Classifications by Membership
International Organizations
Regional Organizations
▪
▪
▪
▪
▪
▪
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
World Health Organization (WHO)
▪
Organization for Economic Cooperation
and Development
European Union
73
Country Classifications by Membership
International Organizations
Regional Organizations
▪
▪
▪
▪
▪
▪
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
World Health Organization (WHO)
▪
▪
Organization for Economic Cooperation
and Development
European Union
United States-Mexico-Canada
Agreement
74
Country Classifications by Membership
International Organizations
Regional Organizations
▪
▪
▪
▪
▪
▪
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
World Health Organization (WHO)
▪
▪
▪
Organization for Economic Cooperation
and Development
European Union
United States-Mexico-Canada
Agreement
Association of Southeast Asian Nations
75
Country Classifications by Membership
International Organizations
Regional Organizations
▪
▪
▪
▪
▪
▪
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
World Health Organization (WHO)
▪
▪
▪
▪
Organization for Economic Cooperation
and Development
European Union
United States-Mexico-Canada
Agreement
Association of Southeast Asian Nations
Asia-Pacific Economic Cooperation
76
Country Classifications by Membership
International Organizations
Regional Organizations
▪
▪
▪
▪
▪
▪
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
World Health Organization (WHO)
▪
▪
▪
▪
▪
Organization for Economic Cooperation
and Development
European Union
United States-Mexico-Canada
Agreement
Association of Southeast Asian Nations
Asia-Pacific Economic Cooperation
Southern Common Market
77
Country Classifications by Membership
International Organizations
Regional Organizations
▪
▪
▪
▪
▪
▪
United Nations
International Monetary Fund
World Bank
World Trade Organization (WTO)
World Health Organization (WHO)
▪
▪
▪
▪
▪
▪
Organization for Economic Cooperation
and Development
European Union
United States-Mexico-Canada
Agreement
Association of Southeast Asian Nations
Asia-Pacific Economic Cooperation
Southern Common Market
Common Market for Eastern and
Southern Africa
78
OECD Member Countries
79
European Union Member Countries
Risk Classifications
Risk Classifications
Risk Classifications
▪ Risk
Risk Classifications
▪ Risk
▪ Loss exposure
Risk Classifications
▪ Risk
▪ Loss exposure
▪ Peril
Risk Classifications
▪ Risk
▪ Loss exposure
▪ Peril
▪ Hazard
Risk Classifications
▪ Risk
▪ Loss exposure
▪ Peril
▪ Hazard
• Physical hazard
Risk Classifications
▪ Risk
▪ Loss exposure
▪ Peril
▪ Hazard
• Physical hazard
• Moral hazard
Risk Classifications
▪ Risk
▪ Loss exposure
▪ Peril
▪ Hazard
• Physical hazard
• Moral hazard
Risk Classifications – Risks
Risk Classifications – Risks
▪ Pure risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk
▪ Operational (internal) risk
Risk Classifications – Risks
▪ Pure risk
▪ Operational (internal) risk
• Personal risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk
▪ Operational (internal) risk
• Personal risk
• Personnel risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk
▪ Operational (internal) risk
• Personal risk
• Personnel risk
• Property risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk
▪ Operational (internal) risk
•
•
•
•
Personal risk
Personnel risk
Property risk
Liability risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk
▪ Operational (internal) risk
•
•
•
•
•
Personal risk
Personnel risk
Property risk
Liability risk
Concentration risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk
▪ Operational (internal) risk
•
•
•
•
•
•
Personal risk
Personnel risk
Property risk
Liability risk
Concentration risk
Reputational risk
Risk Classifications – Risks
▪ Pure risk
▪ Financial risk
• Market risk
• Interest rate risk
• Exchange rate risk
• Other systematic risk
• Credit (counterparty) risk
• Price risk
▪ Operational (internal) risk
•
•
•
•
•
•
Personal risk
Personnel risk
Property risk
Liability risk
Concentration risk
Reputational risk
▪ Strategic risk
Risk Management Process
Risk Management Process
Risk Management Process
▪ The process
Risk Management Process
▪ The process
• Risk analysis
Risk Management Process
▪ The process
• Risk analysis
• Identification and evaluation of the possible outcomes associated
with events or activities
Risk Management Process
▪ The process
• Risk analysis
• Identification and evaluation of the possible outcomes associated
with events or activities
• Risk control
Risk Management Process
▪ The process
• Risk analysis
• Identification and evaluation of the possible outcomes associated
with events or activities
• Risk control
• Exploration of techniques to control adverse outcomes
Risk Management Process
▪ The process
• Risk analysis
• Identification and evaluation of the possible outcomes associated
with events or activities
• Risk control
• Exploration of techniques to control adverse outcomes
• Risk financing
Risk Management Process
▪ The process
• Risk analysis
• Identification and evaluation of the possible outcomes associated
with events or activities
• Risk control
• Exploration of techniques to control adverse outcomes
• Risk financing
• How to finance the costs of adverse outcomes that occur
Risk Management Process
▪ The process
• Risk analysis
• Identification and evaluation of the possible outcomes associated
with events or activities
• Risk control
• Exploration of techniques to control adverse outcomes
• Risk financing
• How to finance the costs of adverse outcomes that occur
▪ The view of risk management is changing
Risk Management Process
▪ The process
• Risk analysis
• Identification and evaluation of the possible outcomes associated
with events or activities
• Risk control
• Exploration of techniques to control adverse outcomes
• Risk financing
• How to finance the costs of adverse outcomes that occur
▪ The view of risk management is changing
• A fragmented approach to the management of risk is less effective
and efficient than an integrated approach that involves all the risks to
which an entity is exposed.
Insurance Classifications
Insurance Classifications
▪ Social vs. private insurance
Insurance Classifications
▪ Social vs. private insurance
▪ Life vs. nonlife insurance
Insurance Classifications
▪ Social vs. private insurance
▪ Life vs. nonlife insurance
• Nonlife insurance also known as general insurance, propertycasualty and property-liability insurance
Insurance Classifications
▪ Social vs. private insurance
▪ Life vs. nonlife insurance
• Nonlife insurance also known as general insurance, propertycasualty and property-liability insurance
• Life insurance dealing with
Insurance Classifications
▪ Social vs. private insurance
▪ Life vs. nonlife insurance
• Nonlife insurance also known as general insurance, propertycasualty and property-liability insurance
• Life insurance dealing with
• death
Insurance Classifications
▪ Social vs. private insurance
▪ Life vs. nonlife insurance
• Nonlife insurance also known as general insurance, propertycasualty and property-liability insurance
• Life insurance dealing with
• death,
• living a certain period
Insurance Classifications
▪ Social vs. private insurance
▪ Life vs. nonlife insurance
• Nonlife insurance also known as general insurance, propertycasualty and property-liability insurance
• Life insurance dealing with
• death,
• living a certain period,
• incapacity (disability and long-term care need)
Insurance Classifications
▪ Social vs. private insurance
▪ Life vs. nonlife insurance
• Nonlife insurance also known as general insurance, propertycasualty and property-liability insurance
• Life insurance dealing with
• death,
• living a certain period,
• incapacity (disability and long-term care need),
• injury or incurring a disease
Insurance Classifications
▪ Social vs. private insurance
▪ Life vs. nonlife insurance
• Nonlife insurance also known as general insurance, propertycasualty and property-liability insurance
• Life insurance dealing with
• death,
• living a certain period,
• incapacity (disability and long-term care need),
• injury or incurring a disease
Chapter 9 (Social Insurance)
Chapter 20 (Insurance Globally)
Insurance Classifications
Insurance Classifications
▪ Personal vs. commercial insurance
Insurance Classifications
▪ Personal vs. commercial insurance
• Industrial insurance
Insurance Classifications
▪ Personal vs. commercial insurance
• Industrial insurance
• Large risks and mass risks in the EU
Insurance Classifications
▪ Personal vs. commercial insurance
• Industrial insurance
• Large risks and mass risks in the EU
▪ Direct insurance vs. reinsurance
Insurance Classifications
▪ Personal vs. commercial insurance
• Industrial insurance
• Large risks and mass risks in the EU
▪ Direct insurance vs. reinsurance
• Direct (writing) insurer, primary insurer
Insurance Classifications
▪ Personal vs. commercial insurance
• Industrial insurance
• Large risks and mass risks in the EU
▪ Direct insurance vs. reinsurance
• Direct (writing) insurer, primary insurer
• Direct premium
Insurance Classifications
▪ Personal vs. commercial insurance
• Industrial insurance
• Large risks and mass risks in the EU
▪ Direct insurance vs. reinsurance
• Direct (writing) insurer, primary insurer
• Direct premium
• Reinsurer, assuming company
Insurance Classifications
▪ Personal vs. commercial insurance
• Industrial insurance
• Large risks and mass risks in the EU
▪ Direct insurance vs. reinsurance
• Direct (writing) insurer, primary insurer
• Direct premium
• Reinsurer, assuming company
• Reinsurance premium
Insurance Classifications
▪ Personal vs. commercial insurance
• Industrial insurance
• Large risks and mass risks in the EU
▪ Direct insurance vs. reinsurance
• Direct (writing) insurer, primary insurer
• Direct premium
• Reinsurer, assuming company
• Reinsurance premium
• Retrocession and retrocessionaire
Insurance Classifications
▪ Personal vs. commercial insurance
• Industrial insurance
• Large risks and mass risks in the EU
▪ Direct insurance vs. reinsurance
• Direct (writing) insurer, primary insurer
• Direct premium
• Reinsurer, assuming company
• Reinsurance premium
• Retrocession and retrocessionaire
Chap 21 (Life Insurance)
Chap 22 (Nonlife Insurance)
Chap 23 (Reinsurance)
The Changing Environment and Risk Management
Rapidly
Changing
Environment

Greater
Uncertainty

Increased Need for
Effective
Risk Management
139