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FINANCE 4355
INTERNATIONAL RISK & INSURANCE
QUESTIONS FOR
CHAPTERS
1,2,3,4,5,6,7,9,10,19,25,24,23,21,27
Terrorism, Directors and Officers
And Alternate Risk Transfer
PROFESSOR DAN C. JONES
UNIVERSITY of HOUSTON
August 2005
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CHAPTER 1
1.1 Historically we have separated business risk or speculative risks from pure risk or
operational risks. Now, enterprise risk management (ERM) has been introduced. What
are your ideas about the merger of all these different risk under one person or sector.
1.2 Individuals, businesses and governments alike ideally follow a risk management
process. What are these steps, what do they involve and are they different when
operations are international and how are they different?
1.3 Is the study of risk management becoming more or less important? Why, give
complete explanation of your opinion.
CHAPTER 2
2.1 What is uncertainty? What creates it and what happens when individual managers
become involved?
2.2 Assume the following:
Marys’ home value
Other assets
Probability of an earthquake
If an earthquake
$150,000
50,000
10%
100% destruction
Show calculations of the premium Mary is willing to pay to insure.
What is the AFP (actuarially fair premium)?
Graphically display the following
Calculate expected value EV,
Calculate the EU, and EUN,
Show the expected utility with and with out insurance
In addition to the AFP, premium loadings apply and could affect Mary’s’ decision to buy
insurance. Calculate and show the effects of a 50% loading in this same chart.
Show also the risk premium for Mary.
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2.3 What are moral hazard and adverse selection? How do insurance companies
counteract each? Are there any substitutes for insurances?
2.4 Risk aversion does not fully explain why firms still buy insurance. What are at least 8
other reasons and explain the rational of each? How does this change, if it does, with
international operations?
2.5 In the private market, explain the 4 requirements that should be met to consider the
insurability of a risk. Are all risk insurable? Why/Why not? Do these requirements
change where there are risk in another country from your home country? Why/Why not?
CHAPTER 3
3.1 Explain how risk management benefits economic development.
3.2 What are property rights and how do they enhance economic development? Do
property rights influence the use of insurance?
3.3 How does insurance benefit economic development? List and explain fully.
3.4 Assuming that insurance allows risk to be managed more efficiently, discuss the risk
management areas of risk pricing, risk transformation and risk pooling and reduction.
CHAPTER 4
4.1 What are the factors that influence consumption of insurance worldwide? Which is
more important and why?
4.2 Insurance cycles, hard market and soft markets are not easily explained or
understood. Describe these cycles, there duration and can a capacity crises arise (or
crunch) actually exist?
4.3 Why do all insurance companies need financial capital? Where does it come from?
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4.4 List and describe insurance company services of the insurance production process.
CHAPTER 5
5.1 How does opportunity cost and comparative advantage influence insurance? Which is
most important and why?
5.2 Looking at one point in time, graphically display the following information
World price (Pw)
Domestic price (Pd)
$10.00
17.50
Because the world price is lower, the market is a candidate for imports and the
Government is considering imposing a tariff of $5. Show the effect graphically.
What does this accomplish for domestic producers?
What is the effect on consumers?
What are dead weight losses and where are they in the graph?
What is the effect on the government?
Show numeric values for each.
5.3 There are at least 4 arguments for restricting international insurance trade. What are
they and what are the rationales behind each?
CHAPTER 6
6.1 What are the fundamentals common to both insurance and finance and how do they
relate to each other? Explain fully.
6.2 Explain how exchange rate risk can be managed. What has been the impact of the
Euro that began January 1, 2002?
6.3 What are the assumptions of the Black-Scholes formula for option pricing?
6.4 Compare insurance and derivatives completely, outlining both similarities and
differences.
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CHAPTER 7
7.1 What are the supply and demand forces that drive integration and globalization
trends? Explain.
7.2 Both political and government forces combine to promote the trend toward
integration and globalization in important roles. List and describe these roles.
7.3 The trend toward financial services integration has given rise to several concerns by
policy makers. List and describe them.
CHAPTER 9
9.1 Describe common law, civil law, Islamic law, Socialist law, Sub-Saharan (Africa)
and the laws of East Asia. Identify countries subject to these laws.
9.2. Legal systems compensate individuals for loss based on tort law. What is a tort and
describe intentional, negligence and strict liability. In what jurisdiction is strict liability
found?
9.3 Describe product liability in the United States, the application of strict liability and
any tort reforms that have been proposed.
9.4 What is the basis of workers compensation laws explaining common law liability for
employers and statutory remedies, using the United States as a situs?
9.5 The many countries of the world have legislated employer provided workers
compensation with many similarities. List and describe these common provisions.
9.6 Describe environmental law in the United States, list some of the litigation that is
now in effect and give your opinion of the effectiveness of this legislation.
9.7 Describe the precautionary principal developed in the environmental policies for the
EU states.
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Chapter 10
10.1 What is the purpose of regulation? How do you view explanation of insurance?
10.2 How can there be government failure in regulation? Describe circumstances.
10.3 In what ways might we justify government intervention in regulation of insurance?
10.4 What are the purposes of licensing of insurance companies and what are the usual
elements of licensing.
CHAPTER 19
19.1 The worlds non-life insurance markets differ in many respects yet global trends for
deregulation, catastrophes and solvency seem paramount. Discuss each of these.
19.2 For the U.S market, one major concern is that of adequacy of loss resources. What
is a loss reserve or claim reserve, what creates them, and what have been the major
contributors to any perceived inadequacy of these reserves?
19.3 the London Market is steeped in insurance lore, particularly Lloyds of London.What
makes this market unique?
19.4 Graphically show the traditional insurance distribution system for commercial lines,
both agency companies and direct writers.
19.5 Chapter 19 reviews many world wide issues that influence insurance cost and
availability. Address these issues, plus other developed during the semester as they apply
to non life insurance.
CHAPTER 25
25.1 Risk management includes 3 principal elements. Discuss each completely including
what is involved in each of the 3.
25.2 What is the objective of risk management? What are the contributing factors?
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25.3 Risk financing addresses how losses are to be financed—either retaining them
(retention) or transferring them, usually insurance. Discuss completely the issues
determining retaining (retention) or transfer (insurance)
25.4 International risk management creates challenges for
Risk Control or loss control. Discuss these techniques and address any risk management
standards that may be in effect.
25.5 List reasons MNEs likely purchase insurance rather than retain risk of loss.
25.6 What are advantages and disadvantages of using admitted insurance in country of
operation?
CHAPTER 24
24.1 Insurance companies seem reluctant to expand globally, the exception being those
already entrenched in global operations. What are some motivations for expansion?
24.2 Entrance by an insurance company into a new country is fraught with accounting
and financial reporting differences. Discuss these differences in accounting and reporting
practices.
CHAPTER 23
23.1 Describe the objective of reinsurance and explain how the reinsurance mechanism
performs.
23.2 Reinsurance demand is influenced by the insurers ownership, structure, the default
risk, investment incentives, real services efficiencies, and the structure of tax codes.
Describe the rationales of each.
23.3 Why do you think reinsurance may be more important for insurance companies in
developing countries?
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CHAPTER 21
21.1 Social insurance, as we know it today, usually meets 3 criteria. What are these
criteria and what is the impact on a nations income?
21.2 What are the rationales for social insurance? Explain each.
21.3 Social insurance programs around the world cover at least 6 different benefit areas.
Describe these benefit areas in the United States and how the benefits are provided.
21.4 Occupational injury benefits or workers compensation worldwide is provided by two
different systems. Describe each and where they exits today.
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CHAPTER 27
27.1 Define employee benefits in its broadest definition
27.2 What are the rationales for employers providing employee benefits?
27.3 Describe the efficiencies that are part of the group mechanism.
27.4 Describe a defined benefit (pension) plan and a defined contribution retirement plan.
Which would you prefer and why? Restrict your comments to retirement plans only
addressing among other things investment risk and the effects of inflations.
27.5 Complete a chart that separates and lists social benefits and employee benefits and
include the decision maker, who pays, if premium is tax deductible and to whom and
what benefits payable to employees is subject to income tax.
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Terrorism Coverage
TEST QUESTIONS
1. Describe briefly tria and explain why it is considered a backstop coverage.
2. Describe briefly one of the other countries terrorism coverage, UK, Spain, South
Africa, Israel, Germany, France.
3. Under what circumstances would you, as risk manager consider the purchase of tria or
stand- alone coverage.
4. Under today’s conditions, would you favor or oppose the extension of tria? Why or
why not?
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Directors and Officers Liability
Test Questions
1.
Describe the responsibilities of Directors and Officers and to whom they are
responsible.
2.
How, legally, are these responsibilities placed on the Directors and Officers?
3.
Name at least 5 actions by D&O’s that could trigger a claim for
indemnification.
4.
What do you find interesting about the Krispy Kreme Legal Acion and the
various allegations?
5.
What is the purpose of the Sarbanes-oxley act particularly paragraph 404 and
what is your opinion of any long term effects of this act?
6.
What are several of the loss prevention guidelines as advocated by Dan
Bailey?
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ART- PART I
Captives
Questions
1. Describe the ownership and use(es) of a captive.
2. List and explain the several benefits of a captive.
3. Do captives provide loss control incentives? If so, describe fully.
4. What is fronting and how is it used?
5. What are the considerations for deciding the domicile of a captive, and differentiate
between onshore and offshore.
6. Tax deductibility of premiums paid to captives is a continuing issue. What are the
issues and the effect on both the captive and the parent? Include in your explanation US
and EU differences.
7. What conditions might exist that would cause you to favor the formation of a captive?
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ART – Part II
Oil Insurance Limited
Questions
OIL
1.
2.
3.
4.
5.
Explain why OIL is considered to be a mutual company
Reflecting on the eligibility stipulations of “Petroleum Operations,” and the
later amendments to “Energy Operations,” what reservations might you have
in becoming or applying to become a member?
The major coverage provided by OIL is property coverage. Gross asset values
are used in determining the standard rate before any other calculations. How
do you justify the use of gross assets?
From the membership list, it is obvious that most members have huge assets.
Why would extremely large firms buy less than the maximum deductible or
not participate in the maximum quota share position?
Explain the rating formula in use to establish the standard rate.
OCIL
6.
7.
Explain fully the meaning of a “claim first made and reported.”
Both the OIL and OCIL policies apply worldwide, are denominated in U.S.
dollars, are subject to New York state law as the governing law and are
subject to mandatory arbitration in London. Why do you think these decisions
were made?
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ART – Part III
Securitization
Questions
1. Explain the capital market products in use:
a) Insurance-linked securities
b) Insurance derivatives
c) Contingent capital arrangements
2. What does securitization mean and how is it used?
3. What are special purpose vehicles and how are they used?
4. Explain tranches and explain how they were utilized in the securitization for USAA.
5. Discuss some of the newer innovations transferring risk with the capital market
6. What is a protected cell? Is it now in use and what are the concerns?
7. Discuss the legal consideration for insurers and SPV’s.
8. Discuss the legal consideration for investors and the use of insurance backed securities
9. What are the advantages of Catastrophe bonds over traditional catastrophe excess of
loss reinsurance?
10. What are the driving reasons for the increasing need for catastrophe bonds? Do you
believe these conditions will continue?
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ART – Part IV
Weather
Questions
1. Why, seemingly all of a sudden, do we now have ways to offset the risk of
weather?
2. How are the risks of utility companies different?
3. What are the characteristics of weather risk?
4. Explain HDDs AND CDDs.
5. How do you feel about the quality and quantity of data and pricing of weather
risks?
6. Discuss the market participants for weather risks.
7. Why have energy companies pioneered innovative risk transfer concepts
including weather?
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ART – Part VI
Loss Portfolio Transfer
Questions
1. What conditions must exist to give consideration to post-loss financing of claims
on a run-off basis?
2. Why might a CFO be attracted to a loss portfolio transfer program and what
changes would occur on his firms balance, that and income statement, and cash
flow? What are any tax implications?
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ART – Part V
Finite Risk Plan
Questions
1. What is a finite risk plan and what are they used for?
2. List 5 common characteristics of finite plans, even though each plan is different.
3. What could be the advantages be of a finite risk plan?
4. The success of the use of finite risk plans is dependant on both tax and regulatory
postures. What are the issues?
5. There are at least 3 disadvantages to finite risk plans. What are they?
6. Discuss FASB 113 and EITF 93-6 and finite risk plans in use
7. An integrated multi-line/multi-year Insurance product exists. How does it work?
8. An integrated risk insurance plan has a limit of $60 million per occurrence and
aggregates. It also has a per occurrence limit of $20 million and a limit of $5 million for
stop loss cover that attaches above the annual aggregate retention $30 million. Fill in the
empty columns assuming that all losses are covered under the plan.
Year Coverage
Loss
1
Property
Marine
1,000,000
2,500,000
2
Marine
2,000,000
3
Property
Liability
Marine
Marine
80,000,000
2,000,000
6,000,000
3,000,000
4
Liability
Crime
32,000,000
1,000,000
5
Marine
Total
Retained
Amount
Stop Loss
Integrated Risk
Layer
500,000
130,000,000
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