UNIVERSITY OF FLORIDA
WARRINGTON COLLEGE OF BUSINESS ADMINISTRATION
RMI 4305: Risk Management, Spring, 2003
INSTRUCTOR:
COMMUNICATION:
EMAIL:
David Nye
329 Stuzin Hall
Voice: Office: 392-6649; Cell: 262-6649; FAX: 392-0301
dnye@ufl.edu
CLASS MEETING TIMES:
T R 11:45 – 1:15
OFFICE HOURS:
MAT 103
TBA
GENERAL OBJECTIVE
The objective of this course is to introduce students to corporate risk management. Students will develop a
core level of knowledge on the principles of risk management and will learn how to apply financial and statistical
tools to make risk management decisions within a general corporate finance framework. Emphasis is placed on the
identification, evaluation and financing of pure or event risks.
SPECIFIC OBJECTIVE: Upon completion of this course, the student should be able to:
1. Define and explain the concept of risk management,
2. Identify and evaluate property and personnel exposures to loss arising out of corporate activities,
3. Create and evaluate risk treatment plans (including avoidance, simple retention, self-insurance,
non-insurance transfer and insurance).
INSTRUCTIONAL TECHNIQUE
The course format will be lecture and discussion of readings as well as case analyses. Periodic assignments
also will be made and graded. Student involvement is important - "One who never asks a question either
knows everything or nothing", M. Forbes (Former Publisher)
GRADING
Exam I
Exam II
Exam III
Total exam weight
Assignments
Total
Default Weight Elected Weight
30%
25% - 35%
30%
25% - 35%
30%
Remainder%
90%
90%
10%
100%
Weight elections for exams 1 and 2 MUST BE COMMUNICATED TO ME IN WRITING NO LATER THAN
TWO (2) WEEKS PRIOR TO THE LAST CLASS OF THE SEMESTER. If no election is made within the
allowed time period, the default weights will apply.
REQUIRED READINGS:
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Risk Management and Insurance, Harrington & Niehaus, Irwin McGrawHill, 1999
Articles listed under each subject heading
OTHER READINGS:
Wall Street Journal
Risk Financing (Volume I and II) A Guide to Insurance Cash Flow
Insuring Your Business, Mooney, 1992, Insurance Information Institute
Financing Risk & Reinsurance Newsletter
Please visit my home page at http://bear.cba.ufl.edu/nye This page contains a variety of information including
sites to visit to obtain jobs in almost any industry.
RETENTION
Class materials will be retained for ten days after the third exam date. If you wish to extend this deadline, you
must notify me in writing by the final exam date.
NOTE
Students should consider taking some CPCU exams. Your business school classes have already prepared you
to successfully take some of these exams and passing them will enhance your marketable skills in the risk management
and insurance area. This could enhance your job marketability by offering potential employers a more diverse range of
subjects studied.
OVERVIEW
Corporate managers and owners generally recognize that one of their goals is to maximize firm value. This
is achieved partly by combining physical assets with personnel assets to produce a good or service that is demanded
in the marketplace. Destruction of or damage to corporate assets could frustrate the attainment of management goals.
Risk management is about identifying risks, preventing losses and financing the recovery from damage to
firm assets. Examples of such damage are destruction of real property, third party claims against the organization,
premature death of a key person and competitors who seek to hire the firm's employees.
Our study of risk management takes place within a general corporate finance setting where we show how
the possibility of financial distress can erode firm value. In fact, it does not matter whether the source of distress is
financial leverage, business risk or insurable risks. The important point is that all types of risk can affect value and
managers must assess and treat all significant risks in an integrated way.
Risk treatment techniques vary widely from complex hedging strategies to manage commodity price risk to
sophisticated risk financing techniques to manage insurable risks. Regardless of the method, the management of
insurable risks is conceptually identical to management of other business and financial risks borne by shareholders.
In spite of these conceptual similarities, there are special institutional mechanisms for financing and/or transferring
what we refer to as insurable risks. In order to know how to use these institutional arrangements to maximize
shareholder wealth, students must learn how to identify, measure and treat a range of firm risk exposures.
Although business school students receive instruction in the fundamentals of accounting, finance, marketing
and management, they are usually unaware of the fundamentals of how to identify loss exposures, assess their
significance and finance the claims that do occur. Untreated, these threats to corporate assets could cause financial
distress. Extreme distress causes insolvency of the entity. Less severe distress may result in reduced ability of the
firm to undertake profitable investments, service debt, pay dividends to shareholders, continue research and
development or carry on some other activity deemed important by owners and managers.
This course is an important component of a business school curriculum because it focuses on the
preservation of corporate value created by production, marketing and finance activities. All students would benefit
from the course because it contributes to their general management knowledge. For some, the course may provoke an
interest in pursuing a career in risk management and this course will provide a firm foundation on which more
specialized knowledge can be added.
ASSIGNMENTS
Assignments to reinforce class material will be made. These will be done individually. All assignments must be
submitted and your score on them will determine your grade for the 10 percent assignment weighting in the course.
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TOPIC
A. OVERVIEW OF RISK
MANAGEMENT
Risk and Its Management
Objectives of Risk Management
READING
Text - Chapter 1
Ch. 1, Q. 1
Text - Chapter 2
“An Integrated Approach to Risk Management” in
Part V: Risk and Liabilities Management
“The Promise and Challenge of Integrated Risk
Management”, Lisa Meulbroek, Risk Management
and Insurance Review, Spring, 2002
B. EVENT RISK IDENTIFICATION
Property, Liability and Personnel
Exposures
ASSIGNMENT
Text - Chapter 12, pp. 265-269
Chapter 14, pp. 329-338, 351-358, Appendix 14
Chapter 16, pp. 387-394
"Property and Income Loss Exposures", Michael F.
Grace
"Liability Loss Exposures", Jack P. Gibson
"Human Resources Loss Exposures", Michael T.
Rousseau
The above three readings are contained in Section
12, AMA Management Handbook,3rd ed., 1994
Ch. 2, Q. 5
Ch. 14, Q. 1
C. RISK ASSESSMENT
1. Loss Forecasting
a. Component Approach
1) Frequency
2) Severity
3) Combining frequency and
severity
b. Aggregate Approach
Text - Chapter 3, Appendix
Chapter 12, pp.269-270, 280-283
Doherty, Chapter 4, “Estimation of
Loss Distributions”
Financial Applications for Risk Management
Decisions, Chapter 3, “Loss Forecasting "
Ch. 3, Q. 9
2. Loss Simulation
Text, Chapter 12, pp. 283-289
Financial Applications for Risk Management
Decisions, Chapter 4, “Loss Simulation”
FF; Chapter 4,
Q 2, 3, 6-10
Text, Chapter 3, Section 3.3-3.4, Appendix
Doherty, Chapter 5, “Portfolio Theory and Risk
Management”
Ch. 3, 5 - 8
Doherty, Ch. 5,
Questions 1 & 2
Q. 1, 4
Review Question 4
EXAM 1
3. Event Risk Portfolios
a. Building blocks
b. Risk definition
c. Examples
D. RISK FINANCING METHODS
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1. Full Transfer - Insurance
2. Partial Transfer
Experience Rating
Retrospective Rating
Large Deductible Plans
Self Insured Retention
Risk Retention Groups
Finite Risk Insurance
3. Full Retention
Self-Insurance
Fronting
Captives: Domestic and Offshore
Markets
Text - Chapter 11, 17 (Section 17.1, 17.3)
“Alternative Risk Financing Plan Discussion”, Risk
Financing, Plan Evaluation, VII.B.1VII.B.16
Chapter 11; Q 3,5
Chapter 17; Q 1,7
http://www.captive.com/service/munichamerican/munich_article1.html
E. CHOOSING A RISK FINANCING
METHOD
1.
Selecting Retention levels
Text - Chapter 9, Appendix 9
Chapter 10, Appendix 10
Chapter 12 (Section 12.2)
Chapter 9; Q 1,6
Chapter 10; Q 5,6
Chapter 12; Q 4,5
“Corporate Insurance Strategy: The Case of British
Petroleum”, Doherty and Smith, The Journal of
Applied Corporate Finance
Chapter 5, “Risk Retention”, Financial
Applications for Risk Management Decisions
2.
DCF Analysis
Chapter 12 (Section 12.5)
Chapter 7, “Discounted Cash Flow”, Financial
Applications for Risk Management Decisions
EXAM 2
3.
Selection Factors & Company
Characteristics
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“Discussion of the Plan Comparison Matrix”, Risk
Financing, Plan Evaluation, VII.A.1-VII.A.7
“Case Studies”, Risk Financing, Plan Evaluation,
VII.C.1 – C21.
“Applying Risk Management Metrics”, Sigma Circle
Solutions, undated.
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F. INSURANCE MECHANISM
1.
Risk Pooling and Insurance
Institutions
Chapter 4
Ch.4, Q6
2.
Insolvencies, Solvency Ratings,
and Regulation
Chapter 5
Ch.5, Q5
3.
Insurance Pricing
Chapter 6
Ch.6, Q1
4.
Risk Aversion and Risk
Management by Individuals and
Corporations
Chapter 7
Ch.7, Q4,8
5.
Insurability of Risk, Contractual
Provisions and Legal Doctrines
Chapter 8
Ch.8, Q7
G. CAPITAL MARKETS AND
EVENT RISKS
Reducing Risk Through Hedging ad
Diversification
Chapter 13
"Insurance Derivatives and Securitization: New
Hedging Perspectives for the US Cat Insurance
Market", Kielholz and Durrer, Geneva Papers on Risk
and Insurance, 1/97, 3-16
EXAM 3
H. INTERNATIONAL RISKS
(If time)
I. RISK MANAGEMENT
ORGANIZATION (If time)
Marketing Insurance Programs
Claims Management
Cost Allocation and Performance
Measurement
Chairman: Dr. Joel Houston, 321 Stuzin hall, 392-0153
READINGS KEY:
Doherty, Corporate Risk Management, A Financial Exposition
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