Reseach method

SEMESTER 1

Module Leader: Dr. David Ayling

Aims: To provide an understanding of pure risk and its management. To provide an analytical background to identifying, measuring, controlling and financing loss exposures. To examine decision rules for choosing between alternative risk management strategies. To apply risk management concepts and techniques in practical situations.

Objectives: After studying this module students should be able to demonstrate an understanding of:

· The risk management function in business, risks faced by business organisations, risk management objectives and the interaction of risk management with other business functions,

· risk identification and measurement (including the uses and limitations of probability distributions) and costs and benefits of risk control and financing techniques

· uses and limitations of insurance within the overall risk management strategy and interactions between insurance and internal risk management activities.

Teaching method: Teaching will be a two hour lecture/workshop per week.

Method of assessment: Course work 40%

Exam 60%

Reading: Main texts

S. E . Harrington and G. R. Niehaus, Risk Management and Insurance, 2nd ed. McGraw Hill International, 2004 (HN)

C.A. Williams Jr., M.L.Smith and P.C. Young, Risk Management and Insurance, 8th. ed., McGraw Hill, 1998. (WSY) (NOW OUT OF PRINT – is also a good text if you can find an old copy (cheap!)

TEACHING AND LEARNING SCHEDULE

2

WEEK 1

Lecture 1: The nature of risk management

Development of risk management

ORM/ERM vs traditional risk management

Risk management objectives

Risk management in organisations

Interactions with other business functions

The risk management cycle

Reading: WSY Chs. 1,2,3,15

HN Chs1,2

Further reading:

G.N. Crockford, 'The changing face of risk management', The Geneva Papers on Risk and Insurance, No. 2, August, 1976, 10-15

R. Damary, 'A survey of the practice of risk management in West European Companies', The Geneva Papers on Risk and Insurance, No.2, August, 1976, 27-55

M. S. Dorfman, Risk Management and Insurance 6th. Ed', Prentice Hall, 1998, Chapter 3

WEEK 2

Lecture 2: Risk identification

The nature of risk identification

Methods and techniques

Qualitative risk identification

Quantitative risk identification

Exercise 1: Accident costing

Reading: WSY Chs.4,15

HN Ch 3

WEEK 3

Lecture 3: Business loss exposures

Property

Personnel

Liability

Financial

Reading: WSY Chs. 5, 6, 7, 8,

HN Chs. 3, 12, 29

WEEK 4

Lecture 4: Risk measurement

Empirical vs probabilistic approaches

Recording data

Accident costing

Loss data presentation and summarisation

Exercise 2: Data summarisation (hand-out)

Reading: WSY Ch. 10

HN Chs. 3, 26

WEEK 5

Lecture 5: Probability distributions

Binomial

Poisson

Pareto

Normal

Lognormal

'Other'

Portfolio effects

Reading: WSY Ch. 10

HN Chs. 3,26

WEEK 6

Lecture 6: Risk control tools

Risk control vs risk financing

Risk avoidance

Loss control

Separation of exposures

Combination of exposures

Risk transfer

Justifying expenditure on risk control

Exercise 3: Case study presentation (not assessed)

Reading: WSY Ch. 1

HN Chs. 11, 26

Further reading: S. Wilkinson, Physical control of risk, Witherby, 1992

WEEK 7

Lecture 7: Risk financing

Risk financing (non-insurance)

Risk financing (insurance)

Optimum retention level

Captive insurance operations

Reading: WSY Chs. 12, 13

HN Chs. 4, 22, 25

Further reading:

A. Gordon, Risk Financing, Witherby, 1992

M.M. Porat and M.R. Powers, 'Captive insurance tax policy: Resolving a global problem', The Geneva Papers on Risk and Insurance', 20 (No. 75, April 1995) 197-229

J.W. Reid, 'The cost of risk and the concept of risk partnership', The Geneva Papers on Risk and Insurance, 20 (No. 76, July 1995) 279-284

WEEK 8

Lecture 8: Influence of the market on risk management decisions

Market morphology

(Re)insurance of (re)insurance

Elements of an insurance premium

Underwriting cycles

Exercise 4: The interdependence of insurance and loss prevention decisions

Reading: WSY Ch. 17

HN Chs. 4, 8

Further reading:

D.E. Ayling, 'The appliance of science', Reactions, No. 4, April, 1986, 27-29

S. Benjamin, 'Loadings for insurance premiums', The Geneva Papers on Risk and Insurance, 11 (No. 39, April 1986), 110- 125

D. Cho, 'Integrated risk management decision-making: A workers compensation loss exposure case study', Journal of Risk and Insurance, Vol. L, No. 2, June, 1983, 281-300

G. Niehaus and A. Terry, 'Evidence on the time series properties of insurance premiums and causes of the underwriting cycle: New support for the capital market imperfections hypothesis' Journal of Risk and Insurance, 1993, Vol. 60, No. 3, 466-479

WEEK 9

Lecture 9: Insurance vs alternatives

Insurance services

Insurance contracts

Uninsurable risks

Management of uninsurable risks

Reading: WSY Ch 16

HN Chs. 10, 20, 22, 25

Further reading:

S.G. Ashby and S.R. Diacon, 'The corporate demand for insurance: A strategic perspective', The Geneva Papers on Risk and Insurance, 23 (No. 86, January 1998) 34-51

B. Berliner, Limits of insurability of risks' Englewood Cliffs, 1982

B. Berliner, 'Large risks and the limits of insurability', The Geneva Papers on Risk and Insurance, 10 (No. 37, October 1985), 313-329

D. M. Jaffe and T. Russell, 'Catastrophe insurance, capital markets and uninsurable risks', Journal of Risk and Insurance, 1997, Vol. 64, No. 2, 205-230

W.T. Karten, 'How to expand the limits of insurability', The Geneva Papers on Risk and Insurance, 22 (No. 85, October 1997) 515-22

H. Kunreuther, 'Rethinking society's management of catastrophic risks', The Geneva Papers on Risk and Insurance, 22 (No. 83, April 1997) 151-76

D. Mayers and C. W. Smith Jr., 'On the corporate demand for insurance', Journal of Business, 1982, 55, 281-296

WEEK 10

Lecture 10: Dealing with insurers

Structuring an insurance program

Criteria for selecting an insurer

Insurance and risk management manuals

Tutorial 5: Case study presentations (assessed)

Reading: WSY Chs. 14, 15, 18

HN Chs. 7, 10, 21

Further reading:

N. Konrath, 'Solvency of insurance undertakings and financial groups', The Geneva Papers on Risk and Insurance, 21 (January 1996) 22-35

INDIVIDUAL ASSIGNMENTS

Choose ONE of Assignment A , B or C. Your assignment should be around 2,000-2,500 words long and typed if possible.

Assignment A:

This assignment is aimed at making you think about the cash flows that occur under different risk management decisions. To do the assignment you need to be familiar with the NPV method of investment appraisal as summarised in WSY8 on pages 333 - 337 or HN pages 585 – 588 or available in any textbook entitled 'Corporate Finance'. Alternatively, satisfy yourself that if NPV is positive in the following equation a project is probably worth undertaking.

Ct

NPV =  t - I

(1+k)

Where , Ct = net cash flows in period t

k = 'a suitable discount rate'

I = the initial investment

t = time period

This equation is useful for investment projects in general but you are required to consider the NPV equation specifically in relation to corporate risk management decisions.

The title of your assignment and the question(s) you must answer is:

a) What are the real-world components of Ct, I and k for evaluating the following types of risk management activities at NPV?

i) risk retention

ii) risk transfer

iii) risk control, and

iv) risk avoidance.

AND

b) Provide practical suggestions for estimating realistic values for the variables identified in part a) of the question.

Hint: Remember that Ct represents net cash flows so you need to consider both positive and negative cash flows.

Assignment B:

If you choose Assignment B your answer might be similar to your answer to Assignment A if you had chosen it - but not necessarily. This assignment allows you greater flexibility to approach the question in your own way and according to your own understanding of the subject.

Your assignment question is:

a) What are the key risk management decisions?

b) What are the direct costs and benefits of these decisions and how might they be estimated?

c) What are the indirect costs and benefits and how might they be estimated?

Hint: There is no universally agreed answer to part a) of the question - but, however you approach part a), keep your answers to parts b) and c) on the same track.

Assignment C:

First of all, decide whether you want to risk manage (for purposes of doing your assignment). It could be a ‘whole organisation’ or ‘part of an organisation’. Make it clear at the beginning of your assignment what exactly you have chosen to risk manage.

Your assignment is then as follows:

Your usual insurer has just sent you a quote for next year's insurance premium and you consider it to be too high.

a) Explain the alternative risk management courses of action available to you, and

b) Explain the thought processes and analysis that should be undertaken in order to choose between the alternative courses of action.