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Review

Review. Principles of Risk Management. Insurance. Decision-Theory. Systems Safety. 1. Introduction. Lecture. Reading. Definition of Risk, Law of Large Numbers, Subjective v Objective Risk, Definition of Peril & Hazard. Methods of handling risk. Catastrophes (Man-made v Natural)

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Review

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  1. Review

  2. Principles of Risk Management Insurance Decision-Theory Systems Safety

  3. 1. Introduction Lecture Reading • Definition of Risk, Law of Large Numbers, Subjective v Objective Risk, Definition of Peril & Hazard. • Methods of handling risk. • Catastrophes (Man-made v Natural) • Risk Management Process • Textbook Chp 1,2 • Textbook, Chp 3 • Beck (2002) – Risk Society • Houck (2010) – Deepwater Horizon • Leveson – System Safety • Textbook Chp 4, p53-68; Chp 5, p73-84

  4. 2. Risk Analysis & Decision-Making Lecture • Risk Analysis • Calculating expected loss (actuarially fair premium). • Variance, Standard deviation. • Risk Pooling • Covariance & correlation

  5. 2. Risk Analysis & Decision-Making A health insurer based in Spain has an insured pool of 100,000 people. It insures them against treatment for cancer only. European statistics show that rates of cancer incidence in the general population are approximately normally distributed with a mean of 194 per 100,000 and standard deviation of 30. Treatment costs historically average out at €275,000. What is the actuarially fair premium? (194/100 000) x €275 000 = €533.50 The insurer wants to have 99% confidence that it will have sufficient capital to meet its potential liabilities. How much capital should it set aside? There is only a 1% chance that more than 263.9 [194 + (2.33 x 30)] people will become ill with cancer. If 263.9 people did become ill then the insurer would be faced with claims totalling €72.57 million (263.9 x €275,000).

  6. 2. Risk Analysis & Decision-Making Lecture Reading • Decision-Making • Utility Theory + Decision-Making • Ambiguity Aversion • Comparative Ignorance • Fox and Tversky (1995), Ambiguity Aversion and Comparative Ignorance. The Quarterly Journal of Economics. P. 585-590

  7. 3. Risk and the Insurance System Lectures Reading • Risk and the Insurance System • Reinsurance • Captives • Legal Principles of Insurance • Textbook, Chp 6, 7 • Textbook, Chp 8,9

  8. 4. Risk Management Issues Lectures Reading • Public Sector Risk Management • Risk Pooling & Health Care Financing • Risk Perception & Risk Communication • Pate-Cornell, E. 2002, Risk and Uncertainty Analysis in Government Safety Decisions (Read to End of Section 3, P. 638) • Smith & Witter (2002, p.1-11) • Wardman (2008), Section 1 & 2

  9. Other Reading • Not necessary for the exam… • McKenna (2011), Why earthquakes are hard to predict, New Scientist. • Martin, S. (2010), Betting on the Lives of Strangers: Life Settlements, STOLI and Securitization, U. of Pennsylvania Journal of Business Law. • Christakis, N. & Fowler, J. (2010), Social Network Sensors for Early Detection of Contagious Outbreaks. • Sterman, J.D. (2011), Communicating climate change risks in a skeptical world, Climatic Change.

  10. Final Exam • 80% of total score • 50 questions (answer all) • No negative marking • Note: You will need calculator, 2B Pencil. Good Luck!

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