Lecture Notes INSURANCE AND RISK MANAGEMENT By Rupesh Sharma

#INSURANCE – is used to cover a type or kind of #RISK

RISK:

• A pervasive condition of human existence • A simple enough notion • Uncertainty – Possibility exists that the outcome can be unfavourable • Each group treats a different body of subject matter, each requires a different concept of risk • Two common elements in different definitions:

1. INDETERMINACY 2. LOSS

INDETERMINACY:

Indeterminate outcome If there is a risk, there must be atleast two outcomes If we are certain that a loss would occur, there is said to be NO RISK Investment in a Capital Asset, certainly involves loss in value due to depreciation. Hence, it’s

not a loss.

LOSS:

One of the outcomes that is undesirable Something that the individual possess and loses OR gains smaller than the gain that was

possible The investor faced with the choice between two stocks may be said to “lose” if he or she

chooses the one that increases in value less than the alternative.

Definition by Emmett J. Vaughan and Therese M. Vaughan:

“Risk is a condition in which there is a possibility of an adverse deviation

from a desired outcome that is expected or hoped for.”

There is no requirement of measurability of the POSSIBILITY Thus, for an insurer, actuaries work to predict the amount of loss and then a premium is

charged based on this expectation. For the insurer, the risk is the possibility that losses will deviate adversely from what is

expected.

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Lecture Notes INSURANCE AND RISK MANAGEMENT By Rupesh Sharma

RISK MANAGEMENT:

• The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making.

• Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance.

• Simply put, risk management is a two-step process - determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives.

• Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate debt, when a fund manager hedges their currency exposure with currency derivatives and when a bank performs a credit check on an individual before issuing them a personal line of credit.

• Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms.

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