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Risk Management and Insurance: Perspectives in a Global
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W. Jean Kwon, Ph.D., CPCU

School of Risk Management, St. Johns University
101 Murray Street
New York, NY 10007, USA
Phone: +1 (212) 277-5196
E-mail: Kwonw@stjohns.edu
 Risk Management and Insurance: Perspectives in a Global Economy

1. Introduction to Risk Management and

Insurance

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and Course Information
Study Points

The importance of an international perspective

Risk management and economic growth

The language of risk and insurance internationally

The environment for risk and insurance internationally

3
Risk and Economic Development
Risk
(Figure 1.1)

Level of Economic Development

4
The Importance of an International Perspective

5
The Importance of an International Perspective

Decisions about how to deal with some risky activities and

processes have become incredibly complex.

The world is getting smaller!

In most markets, a significant proportion of goods and

services competes directly or indirectly with those of other
countries.
The proportion of cross-border trade continues to grow worldwide.

6
The Importance

Foreign direct investment (FDI) inflows tend to grow at

rates greater than merchandise trade

Competitiveness is heightened as price differentiation

becomes a less feasible alternative to improved operating
efficiency.
Even firms not directly involved in international activities are affected.

In a global economy, the way risk is dealt with naturally

differs to suit each countrys socio-cultural, demographic,
political, and economic circumstances.

7
The Importance

Decisions about how to deal with some risky activities and

processes have become incredibly complex.

The world is getting smaller!

In most markets, a significant proportion of goods and

services competes directly or indirectly with those of other
countries.
The proportion of cross-border trade continues to grow worldwide.
See Figure 1.2

8
World Merchandise Trade and GDP (Figure 1.2)

Source: WTO

9
The Importance FDI

The importance of foreign direct investment (FDI)

FDI inflows tend to grow at rates greater than merchandise trade

Competitiveness is heightened as price differentiation

becomes a less feasible alternative to improved operating
efficiency.
Even firms not directly involved in international activities are affected.

In a global economy, the way risk is dealt with naturally

differs to suit each countrys sociocultural, demographic,
political, and economic circumstances.

10
Risk Management and Economic Growth
Growing Importance of Risk Management

A rise in the number of high-value (highly protected) risks

Resource concentration
Pollution as another externality

Risk management has assumed greater importance as its

scope continues to expand.
Today, it finds application in minimizing financial risks to business
and in helping governments resolve public policy issues.

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Role of Risk Management in Economic Growth

Reduce long-term financial variability and render firms more

competitive

From a macroeconomic standpoint, reduce the number of

commercial and industrial enterprises that would otherwise
become insolvent

Via effective loss control measures, reduce the frequency and

severity of causes of economic losses, such as work-related
injuries and work interruption

Reduce production costs, thus making goods and services at

lower cost

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Defining Risk and Insurance

International risk and international insurance commonly

refer to (1) unintended outcomes and (2) insurance
transactions that transcend or cross national boundaries.
International risk can also flow from the consequences of
international business activities.

The importance of the concepts on both a cross-border and

comparative basis.

14
Country Classifications
Developed market economies
Also known as high-income
countries, advanced
countries, economically
advanced countries,
industrialized countries, the
north, and the first world.
Newly industrialized
economies
BRIC
By State of Economic Development
Developing economies
Also known as underdeveloped
countries, undeveloped
countries, low- (or middle-)
income countries, the south
and the third world.
Emerging markets
Economies in transition Least
developed countries
Centrally planned economies
Also known as planned
economies, Communist
countries, and the second
world
15
Worlds Distribution of GDP, Trade & Population
(2002)

16
Worlds Distribution of GDP, Trade & Population
(2009)

17
Country Classifications by Membership

International Organizations Regional Organizations

The Organization for Economic

The United Nations
The International Monetary Fund
The World Bank
The World Trade Organization (WTO)
The World Health Organization (WHO)
Cooperation and Development
The European Union
The North American Free Trade
Agreement
Association of Southeast Asian Nations
Asia-Pacific Economic Cooperation
Southern Cone Common Market
Common Market for Eastern and
Southern Africa

Other (newer)
organizations?
18
OECD Member Countries

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E.U. Members and Applicants

Map
Risk Classifications

Risk

Loss exposure

Peril

Hazard
Physical hazard
Moral hazard
Risk Classifications Risks

Pure risk

Financial risk Operational (internal) risk

Market risk Personal risk
Interest rate risk Personnel risk
Exchange rate risk Property risk
Other systematic risk Liability risk
Credit (counterparty) risk Concentration risk
Price risk Reputational risk

Strategic risk
Risk Management Process

The process
Risk analysis
Identification and evaluation of the possible outcomes associated
with events or activities
Risk control
Exploration of techniques to control adverse outcomes
Risk financing
How to finance the costs of adverse outcomes that occur

The view of risk management is changing

A fragmented approach to the management of risk is less effective
and efficient than an integrated approach that involves all the risks to
which an entity is exposed.
Insurance Classifications

Social vs. private insurance

Life vs. nonlife insurance

Nonlife insurance also known as general insurance, property-
casualty and property-liability insurance
Life insurance dealing with:
Death
Living a certain period
Incapacity (disability and long-term care need)
Injury or incurring a disease

Chapter 9 (Social Insurance)

Chapter 20 (Insurance Globally)
Insurance Classifications

Personal vs. commercial insurance

Industrial insurance
Large risks and mass risks in the E.U.

Direct insurance vs. reinsurance

Direct (writing) insurer, primary insurer
Direct premium

Reinsurer, assuming company

Reinsurance premium

Retrocession and retrocessionaire Chap 21 (Life Insurance)

Chap 22 (Nonlife Insurance)
Chap 23 (Reinsurance)
The Changing Environment and Risk Management

Rapidly Greater Increased Need

Changing Uncertainty for Effective
Environment Risk
Management

26
Discussion Questions

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Discussion Question 1

Is an appreciation for international events important to

students of risk management and insurance, even if they
intend to work exclusively for domestic firms with no
international operations?

28
Discussion Question 2

Is the study of risk management becoming more or less

important in your country?

29
Discussion Question 3

What special risks would you expect multinational

corporations to encounter that purely national firms
ordinarily would not encounter? Speculate about some of
the ways of dealing with such special risks.

30
Discussion Question 4

Randomly select one economically developed country and

one developing country, and compare classification of
insurance between the two countries.

31
Discussion Question 5

What do you think are the prerequisites for the development

of insurance in economically underdeveloped countries?

32