FIN3440Test1

FIN3440Test1 - FIN3440Notes8/31/11 31/08/201118:30:00 Risk

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FIN 3440 – Notes 8/31/11 31/08/2011 18:30:00 Risk 2011 fall semester begins, probably expect no major losses: car or helath But the chance that you will is a risk Insurers also have to forecast their losses, since they are in the business of  paying for them They forecast their losses for the year too, and any major variations from forecast  are a risk to them Expected Loss High Severity ($1 million) X Low Probability (1%) = $10,000 (Transfer Risk) High Severity ($1 million) X High Probability (100%) = $1 million (Avoid Risk) Burden of Risk Gain/Loss (Investments) Loss Only (Car, Home, Health) Our Course: Loss Only Products/Services too risky: OB/GYN (malpractice   son-in-law’s partner had to  pay $100K per year in malpractice insurance), BP Oil Spill, Pharmaceuticals, and others  can be withdrawn, And
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Businesses/Individuals can avoid (this is a luxury that most businesses don’t  have), retain (just have to deal with it), transfer (through contracts or insurance), or  reduce (always consider this) risks Costs of Risk Management: Outlay to Reduce: retail store (guard/sprinkler), oil rig (blowout preventer) Opportunity Costs: OB/GYN and other high risk services/products withdrawn Expenses to Finance: insurance or self-funding (planning, personnel) Losses not covered: Underinsured (Business/Individual) Definitions of Risk Important for Insurance Pure risks  (downside only) are our focus; normally only type insurance covers Static risks  (Random losses due to nature/people that are ideal to insure) Objective risks  (reliable data/statistical techniques) Dynamic risks   changes in technology  Sources of Pure Risk Property     Businesses/Individuals: buildings, homes, automobiles in Hurricane Katrina
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“Ripple Effects” of Disaster (Overheard) Liability (“3     rd     party” insurance, tort law)     Injury on property: home, apartment, business Car Accidents: mandatory minimal liability in all states Product Liability: “runaway” Toyotas, lawyer  TV ads on drugs? Environmental Pollution: BP Disaster in Gulf of Mexico Employee Rights: Discrimination, Unlawful Dismissal                                                                Victim (3 rd  party)             You/Me                                                                   Insurance Company (2 nd  party) Personal Risks (“1     st   
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FIN3440Test1 - FIN3440Notes8/31/11 31/08/201118:30:00 Risk

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