C. Below are some descriptions and examples of risks. Mark those, which refer to speculative risk “SR”, and those, which refer to pure risk “PR”. 


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C. Below are some descriptions and examples of risks. Mark those, which refer to speculative risk “SR”, and those, which refer to pure risk “PR”.



  Description/example Type of risk
  Can only result in a loss. Managing director of company dies.  
   
  Quality of management decisions.  
  Can result in profit or loss.  
  Competitor goes out of business.  
  Because of fire at factory, January sale is cancelled.  
  Price of coffee beans in Brazil rises sharply.  
  Company is sued because of injury to a worker.  

d.

d) Listed below are the seven methods of dealing with potential losses. Match the method on the left with the appropriate example on the right.

Method of dealing with losses Example of method
Insurance a. A company forms a subsidiary to provide it with insurance.
 
Risk avoidance b. A building lease includes a cancel option for outdated building.
Risk assumption c. A company does not invest in a country where war is likely.
Self-insurance d. An automatic fire sprinkler is installed in a warehouse.
Loss prevention e. A Los Angeles firm arranges compensation in case of an earthquake.
Loss reduction f. A safety officer is employed to minimize staff injuries.
Risk transfer other than insurance g. A company decides to bear the possible loss of small tools.

E) Two methods of risk management are discussed in more detail in the text. Below, identify the two methods at A and B. Then write the two main points which are given about each method in the text.

Risk management method A:_________

Main points of method:

(1) _____________

(2) _____________

Risk management method B:_________

Main points of method:

(1) _____________

(2) _____________

Practice II

Read the following text and be ready to speak on the functions of insurance in the modern economy.

Insurance, capital and economic stability

Insurance is not just about the financial compensation of victims; insurance is also the central part of the capitalization process of a modern economy. It creates huge capital assets. The Amsterdam Circle of Chief Economists (ACCE), which is coordinated by The Geneva Association, estimated the total share of insurance assets in 2007 to be around 11 per cent of all assets worldwide. The funds handled by insurance, due to the nature of the contracts and the sometimes very long time horizons involved, usually stay in the financial market of a given economy for quite some time. Most often it is not fickle investment capital that rushes around looking for quick gains, as it is oriented towards the medium to long term. It thus plays a special role underpinning the steady growth of an economy.

 

The insurance mechanism furthermore allocates assets according to market forces where needed, and this in a largely stable environment. It allows a process of maximizing returns according to market forces that are directly related to the existing risk structures. At the same time, insurers have to produce a return on their assets and as market participants looking for profitable investments, they are submitted to the same basic constraints that other investors face. It would be naive to assume that asset managers in insurance would stop investing in a certain sector solely because of that sector’s negative climate impact. As long as external effects on climate change are not fully internalized by those actors responsible for them, asset managers will respond to the distorted incentive to invest.

 

Another key point is the buffer function of insurance in the modern economy. This buffer function is of great importance for a modern economy because it allows filtering out sudden surges in financial needs linked to a disaster for all insured players that might otherwise be pushed into bankruptcy. The existence of insurance allows forward planning with more certainly, avoiding or mitigating specific risks that are deemed to be threatening to the general business process.

 

Even when subjected to great stress, the insurance sector has a tendency to be more stable than other parts of the financial services sector, as the current financial crisis has demonstrated. Insurance crises play out in fundamentally different ways compared to e.g. banking crises. In a banking crisis the most feared phenomenon is a run on a bank. The effect is immediate and it has to be stopped otherwise it will destroy the economy as ever more funds are withdrawn and the capacity of the banking system to cope with the reduction in assets deteriorates very rapidly. A major crisis in insurance sector develops differently as there is less liquidity risk and usually more time to react. Most insurance risks cannot be triggered by the policy-holder. Or, such as in the case of risk life, accident or health policies, they will usually not be triggered as they involve grave personal harm. Even in the case of saving products, insurance companies often build in withdrawal costs that stabilize the system in adverse times as it makes the cancellation of policies more costly to be insured.

 

In the event of an insurance firm becoming technically insolvent it can continue to operate for a certain time (sometimes years) without having to cease its activities. After a major crisis insurers could start paying out claims while recapitalizing at the same time and using parts of the premium income for future risks to finance current liabilities. While this s not a desirable situation, both insurers and regulators, would want to avoid it whenever possible, in a moment of utmost stress on the financial system, the resilience is much higher for insurers than for banks due to this flexibility.

Practice III

Read the following text and be ready to speak about a positive impact of insurance on the process of savings. Give your own examples to illustrate the statement from the text.

Insurance, savings and risk spreading over time

Insurance is one of the rare mechanisms that allow spreading risk over time. This risk spreading over time can involve very long periods and works even from one generation to the next. There are very few other industries that have as long a time horizon as the insurance industry. Who else would think more than 50 years ahead? Perhaps the builders of a nuclear power plant, but few others. And insurance has to consider periods of up to a century. The French woman Jeanne Calment, who lived to the age of 120, had she taken out a life insurance policy with an annuity component around the time she was 20 years old, this policy could have been in force for about a century.

 

Insurance has a double positive impact on the savings of an economy: firstly, it increases the general savings rate, especially through the existence of life insurance products but also by creating pools of assets that are meant to cover potential future claims. It thus creates deeper markets and allows for more investments. Secondly, it decreases the level of unnecessary (individual) precautionary savings, which is often not available to capital markets. This stimulates investment and consumption by reducing bound (and therefore unproductive or less productive) capital. Insurance thus helps to provide more working capital to an economy because people do not have to protect themselves against the eventuality of, for example, their home being destroyed by a fire. They just have to secure adequate cover through a fire insurance policy and be ready to pay a much lower amount of money over a longer period – a totally different mechanism. This means that the money saved in the process can be allocated to other things, more in line with the preferences of the individuals and more productively. In the process, insurance mechanisms transform dormant capital into free capital.

 

Overtoyou:

Carry out a research on the types of insurance services provided by insurance companies and other financial institutions. Describe the services in question and illustrate them with examples.

What are the major insurance companies operating in the world insurance market? Use different sources of information and make presentations about their activity.

What do you know about the problems connected with the development of insurance market in Russia? Which types of insurance progress more rapidly? Why?

4. Role-play:

Conduct a business seminar with the participation of representatives of the world’s major insurance companies and discuss the latest trends in insurance business development. Touch upon the impact of the latest financial crisis, recent natural disasters and other developments on the insurance industry.

 

PART II

Revision

UNIT I



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