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Topic 2. Risk and Terminology

Topic 2. Risk and Terminology. Bus 200 Introduction to Risk Management and Insurance Jin Park. Overview. Risk Pure vs Speculative Fundamental vs Particular Systematic vs Nonsystematic Objective vs Subjective Risk Averse, Neutral, or Seeker Peril, Hazard ERM, IRM. Risk.

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Topic 2. Risk and Terminology

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  1. Topic 2. Risk and Terminology Bus 200 Introduction to Risk Management and Insurance Jin Park

  2. Overview • Risk • Pure vs Speculative • Fundamental vs Particular • Systematic vs Nonsystematic • Objective vs Subjective • Risk Averse, Neutral, or Seeker • Peril, Hazard • ERM, IRM

  3. Risk • Deviation from expectation • Worse than expected • Better than expected • Uncertainty concerning a loss • Uncertainty • Loss

  4. Pure Risk Loss or no loss Fire, Hurricane, Theft Risk management & Insurance Speculative Risk Loss, gain, or no loss/gain Investment, gamble Finance Risk Enterprise Risk Management deals with managing both risks in a firm

  5. Objective Risk Fundamental Risk Systematic Risk Subjective Risk Particular Risk Nonsystematic Risk Risk

  6. Peril • (Immediate) Cause of loss • Natural versus Human perils • Insurable versus non-insurable

  7. Hazard • Condition that creates or increases the chance of losses, their severity, or both. • Physical hazard • Moral hazard • Morale hazard

  8. Game 1 5% - $1 million 95% - none Game 2 5% - $10 95% - none Game 3 50% - $900,000 50% - $100,000 or $50,000 or $.50 or $500,000 Are you risk averse?

  9. Enterprise risk management • IRM: Integrated risk management • The process of planning, leading and controlling the activities of an organization to minimize the effects of risk on earnings and capital • Requires a (strategic) risk management policy • Needs support from the top level of a firm

  10. Enterprise risk management • A holistic approach to risks faced by a firm • Risk management has to be integrated among various players in a firm • Steps in developing an ERM program

  11. Next • 3. Loss Exposures ETTI: Chapter 1, pp. 16 – 18 ETTI: Chapter 8, pp. 162 – 164, 170 – 176 ETTI: Chapter 9, pp. 180 - 203 • Business continuity planning: Preparing for the worst, KPMG Insiders, June 10, 2002 • U.S. firms underestimate IT risks, Insurance Day, June 14, 2002 • Prudent Man with a Plan, CFO Magazine, June 18, 2002. • Warning: A batman cape won’t help you fly, New York Times, March 5, 1997. • Legal Dimensions in Recreation, Leisure Activities, and Sports: Negligence Concepts, date and author unknown.

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