Risk Management and Insurance

Risk Management and Insurance^*
Spring 1998

Professor Richard MacMinn

Department of Finance
320b Hagerty Hall
Phone: (614) 292-0229
mailto:macminn.2@osu.edu

Office Hours: To be announced

Provide a overview of the risk management process
Provide the analytic tools to identify, analyze, and manage risks
Provide an analysis of risk markets

0. What is risk? risk management?

1. Risk Management and Objectives: This topic includes how risk management functions are integrated into the individual's or organization's objective function.

2. Risk Assessment

3. Risk Control: This will include some explanation of the notion of risk reduction through pooling arrangements and the initial development of the theory of an insurance firm. This topic would also include default risk, monitoring, regulation, and government guarantees.

4. Risk Finance

5. Risk Markets

Supply This topic will include the development of the theory of the insurance firm. It will build on the risk pooling notions and add other activities such as investment. The organizational form will also be considered here, e.g., mutual versus stock companies.

Demand This topic may include a variety of different forms of insurance so that the impact of risk aversion may be used to motivate the consumer demand in some lines while taxes, financial distress, agency costs, etc. may be used to motivate the corporate demand. This topic area will also include some of the problems in insurance pricing such as adverse selection and moral hazard problems. The notions of risk reduction and self-insurance will also be included for both the consumer and corporate demands. On the corporate side of the analysis, we will include a comparison of insurance with other financial instruments that are used to hedge risk. The economic functions and impact of major liability rules, e.g., strict liability versus negligence, on the choices made by agents and corporations and hence on the demand for insurance will also be investigated.

Equilibria A sufficiently robust theoretical development will allow some discussion of the rationale for cycles and crises in some lines of insurance. Insurance pricing will be analyzed. With the appropriate data this is also where the market movements may be investigated.

Texts:

Required

Risk Management and Insurance by C. Arthur Williams, Jr., Michael L. Smith, and Peter C. Young
Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

Recommended. This book is out of print but we will be using drafts of some chapters. The drafts of some revised chapters will be made available through the copy center.

Corporate Risk Management: A Financial Exposition by Neil A. Doherty

Reading:

Date	Reading	Case	Quiz
March 30 April 1	Risk and Uncertainty Williams 1 Bernstein 1-5	National Insurance Corp.	Pre-Screen Risk and Uncertainty
April 6 April 8	Risk Management Williams 2, 3 Bernstein 6 Doherty 1-3 Rothschild and Stiglitz Notes Fisher Notes	USAA: Catastrophe Risk Financing	Risk Management
April 13 April 15
April 20 April 22	Risk Assessment Williams 4-10 Bernstein 7 Doherty 4, 7	The Global Insurance Company	Risk Identification
April 27 April 29
May 4 May 6	Risk Control Williams 11 Bernstein 8 Doherty 8, 13	Equitable Life Assurance Society of the United States	Risk Control
May 11 May 13	Risk Finance Williams 12, 13 1995 Bowles Symposium Doherty 9-12	USAA: Catastrophe Risk Financing	Risk Finance
May 18 May 20
May 25 May 27	Risk Markets Williams 16-18 Bernstein 9	Equitable Life Assurance Society of the United States Demutualization of Insurance Companies Industry Note National Insurance Corp.
June 1 June 3

Grading:

You will be asked to complete quizzes on most of the assigned chapters in the Williams text. The quizzes will be administered and graded online. The links will appear above along with the reading list and the due dates for the quizzes will be given in class. It is your responsibility to read the Williams text and take the quiz before the due date. You may take the quizzes more than once but I will use your first score. You are on the honor system. Evidence of violations of the honor system may result in an in class final exam.

You will be expected to complete two or more group projects. The projects will be discussed in class and each group will make a formal presentation of its results. One of the projects will be the presentation and discussion of a case study; another group project may be the assessment of a corporation’s risks using financial data from a source such as EDGAR.

Course grades will be determined, without a curve, using the cumulative course scores. The cumulative course score will be determined according to the following formula: Course score = (.2) P + (.5) G + (.3) A, where P, G, and A represent the class participation, group projects, and individual assignment and quiz scores, respectively. The individual score may include a final exam score. Finally, at my discretion, the class participation score may also be based on attendance.