Graduate-property-Chap001 Risk and its management.pptVIP

HN, ch. 1 Property Risk Managementand Insurance Graduate Program School of Insurance UIBE Dr. Zeng Lixin Chapter 1 Risk and Its Management What’s your understanding of RISK? What is Risk? Two Important Meanings of Risk A situation is riskier than another when (1) there is greater expected loss Example: young male drivers are riskier than middle-aged drivers (2) there is greater variance (less predictability) of outcomes Example: a bio-tech stock is riskier than a utility stock Risk is Costly Greater risk imposes costs (reduces value) Example: Identical properties subject to damage Greater expected property loss lowers value of property, all else equal Greater uncertainty about property loss often lowers value of property, all else equal Product with defective design (no prevention, some prevention ) Importance of Indirect Losses Direct Losses often cause indirect losses Example: What are the direct and indirect losses if a manufacturing plant experiences a major fire? Major Types of Business Risk (I) Major Types of Business Risks (II) Major Types of Personal Risks Pure Risk versus Other Types of Risk Generalizations: Pure risk usually involves large potential losses relative to the expected loss Pure risk involves events that are firm-specific Price risk affects many firms Pure risk is managed by insurance Price risk is managed by derivatives Pure risk involves wealth losses to society Price risk often involves wealth redistributions in society Nevertheless, use the same framework for management of pure risk and price risk The Risk Management Process (1) Identification of risks (2) Evaluation of frequency and severity of losses (3) Choosing risk management methods (4) Implementation of the chosen methods (5) Monitoring the performance and suitability of the methods. Major Risk Management Methods Objective of Risk Management Need for a RM Objective Risk imposes costs on businesses and individuals Risk Management (e.g., loss