Risk Management and Insurance

1. What do you mean by risk? How objective risk does differs from subjective
risk?
2. Discuss the different classification of risk.
3. Explain the difference between pure risk and speculative risk.
4. What are the techniques for managing risk? Discuss.
5. “Risk control is a generic term to describe techniques for reducing the
frequency or severity of losses”. Enumerate the above statement by explaining
the major risk-control techniques.
6. “Insurance is the pooling of fortuitous losses by transfer of such risks to
insurers, who agree to indemnify insured for such losses, to provide other
pecuniary benefits on their occurrence or to render services connected with the
risk”. Highlight the above statement by explaining basic characteristics of
insurance.
7. What are the different types of private insurance? Explain.
8. Explain how insurance can provide benefits to the community.
9. Discuss the fundamental principles of insurance that are reflected in insurance
contracts.
10. What are the requirement of an insurance contract? Explain.
11. What do you mean by deductibles? What are its important purposes?
12. What are the essential elements of negligence? Explain.
13. Ocean marine insurance provides protection for goods transported over water
and Inland marine insurance provides protection for goods shipped on land. Do
you agree with above statement? Discuss. (Transportation Insurance)
14. What is Business Owners’ Policy (BOP)? Explain the basic characteristics of
the property coverage in the Insurance Service Office (ISO) form.
15. Explain the major general liability loss exposures of business firm.
16. What do you mean by directors and officers liability insurance? Explain the
insuring agreements that typically appear in a directors and officers liability
policy.
17. There are altogether 38 (20 non-life and 18 life) insurance companies as of mid-
July 2018. The data received from Insurance board of Nepal, reveals that total
assets/liabilities of insurance companies rose by 40.03 percent to Rs 260.30
billion in 2017/18. Total assets of life insurance companies’ and non-life
companies expanded by 207.95% and 67.36% respectively. While the coverage
of insurance penetration is very low in comparison to other financial services in
Nepal, there have been some sign of significant growth in recent years.
Insurance policies rose in number significantly after the devastating earthquake
of April 25, 2015 but slightly declined in the review year. There is only one
reinsurance company in Nepal which was formally established in November 7,
2014. As of mid-July 2018, the total number of banks and financial institutions
stood at 151 comprising commercial banks 28, development banks 33, finance
companies 25 and microfinance development banks 65. Besides, 40 other
financial intermediaries licensed by NRB, 39 insurance companies (including
20 life and 18 non-life and one Reinsurance company) and several non-banking
financial institutions such as EPF, CIT and Postal saving bank are also in
operation. The insurance company in total stock market is occupying only 5.39
percent in the market structure. The proportion of Reinsurance Company is only
market structure. The proportion of Reinsurance Company is only 0.21 percent.
This has indicated that the growth of insurance business in Nepal is slow. The
financial system also includes insurance companies under the preview of
Insurance board (NRB report, 2018). With available information, the insurance
market is taking the pace of development however the increasing rate is found
slow. Nepali people are still not familiar on the importance of insurance in
Nepal. The Nepalese government has not made insurance mandatory except in
few sectors. Insurance literacy is very minimal and effort for it is also not
encouraging. For example, very few modules related to insurance is used in
University courses. There are lots of issues and challenges of insurance
business in Nepal. The influence of private insurance companies is high in
policy formulation. Nevertheless, the necessity of leveraging insurance service
in Nepali context cannot be ignored.

Questions:
(a) State the major issues and challenges of insurance business in Nepal.
(b) As a financial analyst, recommend the solution to overcome the insurance
issues and challenges in Nepal.
(c) What will be the government role to implant the insurance business
efficiently and effectively in Nepal?
18. Insurance industry around the globe has undergone significant changes over
the past two decades of period. The major changes that have taken place in
insurance industry are deregulation and globalization. In economic sense,
deregulation refers to the process of liberalizing state regulations in
economic activities. Deregulation is initiated to ensure consumer welfare by
reducing costs and prices of economic services, improving quality and
variety of services, providing incentives for firms to adopt new technologies
and improving competition and productivity. Regulation has been observed
to create inefficiencies, such as cross-subsidies among groups of consumers
that are reduced or eliminated under deregulation. Insurance industries were
highly regulated in any economy since the past, which still continue to be
regulated under the strong regulatory framework of governments in many
countries. However, because of the competitive nature of insurance industry,
governments in some countries have realized that deregulation brings
benefits to insurance consumers similar to those realized in other
deregulated industries. As a result, insurance industry has experienced
significant deregulation in many aspects. The rapid rise in insurance
premium costs coupled with the problem of obtaining insurance at any cost
for some applicants hurried a crisis in the insurance industry. Deregulation
has appeared as a solution for this problem in a sense that actions of a free
market are only the efficient means of controlling costs and affordability.
Deregulation in insurance industry has started to demonstrate several god
consequences such as maintaining the financial solvency of insurance
companies, keeping premium from being excessive, preventing
discrimination among policyholders and making insurance available and
affordable to all desiring it.
Globalization refers to the process of economic integration among the
nations. The process of globalization is one of the major trends which the
insurance industry is facing worldwide. With globalization, insurance sector
has gained the international character of risk sharing through cross0border
relations with respect to many other lines of business. Increasingly,
insurance cover for households or companies is granted beyond national
borders. Moreover, many insurance companies offer their products in
foreign insurance markets or have become part of multinational insurance
group. The cross-border relations in the area of primary insurance have
strongly increased over the last two and half decades. This becomes
apparent, above all, from growing cross-border business via subsidiaries, the
expansion of multinational insurance groups sand increasing international
division of labor within these groups. The increasing integration of the
global economy was initially based on trade in industrial goods. It was not
before the 1970s internationalization became a major trend in the financial
sector as well. The reduction of legal barriers to cross-border activities of
 financial services, companies, the opening – up of new markets to foreign
providers and deregulation of many national markets have played key role in
the context of globalization of insurance industry.
Questions:
a. Deregulation and globalization are the major changes that have
taken place in insurance industry. Do you agree with this
statement? Discuss.
b. What kind of risks have you seen in insurance industry in future?
Explain.
19. The banker (portfolio manager) normally attempts to increase the value of
the portfolio of investment subject to instruction that imposes various
constraints on the banker. Financial Risk management is very much
concerned about the difference between the values of the portfolio of assets
and the liabilities which are associated with this portfolio of assets.
The main advantage of central Risk management is the absence of the
conflict of interest. Central Risk management is not extracted through
market. Each business is seen by different ways. Independence fails in
financial risk management just because of when banker takes a higher risk in
order to get personal gain. When an individual takes a risk more than risk
appetite of the company it results in independence fails.
Financial risk management is all about identification, quantifying and
management of the risk that the organization faces. It is not possible to
eliminate risk but by performing effective financial risk management,
organization can reduce the risk to the acceptable level. Every organization
has risk appetite, and remaining within the risk appetite, the portfolio of
manager of the organization make investments.
a. Value of the portfolio of assets and the liabilities are very much
concerned with financial risk management. Discuss.
b. Performing effective financial risk management, organization can reduce
the risk to the acceptable level. Explain.
20. Financial Risk Management
The confusion always exists between trader and the banker. The objective of
the trader is to make banker conduct transaction for trading so as to get
commission on every transaction. It increases the conflict of interest because
whether investment in asset is risky or not the trade will persuade the banker
in order to make investment.
The objective of the banker is to maximize the value of company’s portfolio
of investment that is why he considers all possible outcomes and remain
overcautious about risk management. Trader normally prefers riskiest asset
even though this selection could lead to destroying value of the portfolio of
the investment.
By using this model we can see risk management failure and confusion
about bankers and traders. First we can see the increase confusion in the
choices of the two assets of trader results in inappropriate selection of the
asset for investment. The pressure on the trade poses the trader in a situation
where he is asked to increase the PNL and it results in prevention of risk
management from performing effectively.
If trader prefers risky asset to banker then increase in risk of assets traded
results in reduction of the positive impact of risk management independence.
Since trader gives preference to risky assets, trader becomes more biased
towards risky assets. It creates confusion between trader and banker for
choosing appropriate asset for investment.
By performing hedging, financial professionals can meet the number of risk
management objectives such as they can decrease volatility of cash flows,
the can offset interest rate fluctuations to minimize price risk and default risk
etc. Hedging
In order to protect for volatility of the price of assets, in which investment
has been made, the banker carry out hedging techniques. The hedging assists
bankers in minimizing expected loss. The banker attempts to go towards
forward rate agreement and options in order to hedge its investment the
trader who provides options and forward rate agreement to banker will seek
for providing higher number of options. The confusion between banker and
trader would remain exist because if options become favorable to banker
then he is going to exercise that option and it results in loss to trader who
provided option.
Nonetheless, Trader could protect himself through delta hedging. Delta
hedging from the perspective of the writer of the option is neutral. Banker
can provide the expected loss that could happen to the portfolio of
investment by using Value at risk.
Creation of Income
The confusion between banker and trader exists because the objective of the
banker differs the objective of the trader. The confusion of creation of
wealth between banker and trader is to banker create wealth by making
secured investments and less risky in which volatility of the prices is low.
However, the trader always persuades the banker for making investment in
assets whether it is risky or not. Since trader earns commission on the each
transaction conducted by banker. This is what confusion remain between
banker and trader with respect to financial risk management.
a. The objective of the banker (portfolio manager) is to maximize the value
of company’s portfolio of investment that is why s/he considers all
possible outcomes and remain overcautious about risk management.
Enumerate.
b. “The hedging assists bankers in minimizing expected loss”. Do you agree
with this statement? Explain.
c. What confusion may exist between banker (portfolio manager) and trader
(broker)? Discuss.