Foreword
To facilitate teachers in teaching the topic Risk Management of Financial Management covered under the Business Management Module of the Business Accounting and Financial Studies (BAFS) curriculum, the Technology Education Section of Curriculum Development Institute, Education Bureau developed this learning and teaching resource materials to provide teachers with a variety of learning and teaching examples for reference.
This resource materials include lesson plans, PowerPoint presentation slides, case study and other teaching activities, in-class exercise and home assignment as well as quiz with suggested answer, with suggested answers.
This resource materials are by no means exhaustive. Teachers are advised to update any business data/information adopted in this resource materials if deemed
necessary.
1
Teaching plan for lesson 1:
Meaning of risk and the difference between speculative risk and pure risk
1. Objectives:
Upon completion of the lesson students should be able to:
a) Explain different concepts of risk b) Describe the meaning of risk
c) Demonstrate the ability to measure the magnitude of a risk d) Differentiate speculative risk from pure risk and provide examples e) Explain the importance to distinguish speculative risk from pure risk
2. Suggested teaching schedule
Content PowerPoint Remarks Estimated time
1 The silver bond 2-3 Introductory
case
3 mins
2 Meaning and magnitude of risk
4-9 13 mins
3 Pure risk vs Speculative risk 10-15 12 mins
4 A closer look at the pure risk 16-17 4 mins
5 Discussion and conslusion 18 8 mins
Total 40 mins
2
Teaching plan for lesson 2:
The insurable vs non-insurable risks
1. Objectives:
Upon completion of the lesson students should be able to:
a) Describe the meaning of insurable risk and non-insurable risk
b) Explain different criteria applied to distinguish insurable risk from non-insurable risk c) Differentiate insurable risk from non-insurable risk and provide examples
2. Suggested teaching schedule
Content PowerPoint Remarks Estimated time
1 Boycott the cosmetic company
2-3 Introductory
case
5 mins
2 How speculative and pure risk relate to risk
insurability
4 Revision 2 mins
3 Insurable risk vs Non-insurable risk
5 5 mins
4 Criteria for insurability 6-11 15 mins
5 Recall the introductory case
12-13 Group
discussion
8 mins
6 Conclusion 14 5 mins
Total 40 mins
3
Teaching plan for lesson 3:
Risk Management Strategy I
1. Objectives:
Upon completion of the lesson students should be able to:
a) Explain the meaning of risk management b) Describe the importance of risk management c) Differentiate different risk management strategies
d) Illustrate how to apply risk prevention/reduction strategy with examples
2. Suggested teaching schedule
Content PowerPoint Remarks Estimated time
1 Contaminated pig 2-3 Introductory
case
5 mins
2 Meaning of risk management
4 2 mins
3 Contents of risk management
5 2 mins
4 Why risk management 6 2 mins
5 Overview of Risk management strategies
7-8 5 mins
6 Risk reduction: concept and applications
9-18 20 mins
7 Summary 19 4 mins
Total 40 mins
4
Teaching plan for lesson 4:
Risk Management Strategy II
1. Objectives:
Upon completion of the lesson students should be able to:
a) Explain the meaning of risk avoidance strategy and how it can be applied b) Illustrate how to finance the loss when the hazards happen
c) Demonstrate how the risk assumption and risk transfer strategies can be applied to business operations with examples
d) Analyse how different risk management strategies can be combined in application so that risk faced by the firm can be minimized at a reasonable cost
2. Suggested teaching schedule
Content PowerPoint Remarks Estimated time
1 The cyber attack 2-3 Introductory
case
5 mins
2 Risk avoidance 4-5 3 mins
3 Strategies in preparing financing in case the loss occurs
6 2 mins
4 Risk transfer 7-8 5 mins
5 Risk assumption 9-14 15 mins
6 Recall: Cyber Attack Case 15-17 Group discussion
8 mins
7 Conclusion 18 2 mins
Total 40 mins
5
Teaching plan for lesson 5:
The Risk Management Process
1. Objectives:
Upon completion of the lesson students should be able to:
a) Explain each step of the risk management process
b) Illustrate how different types of risks can be identified and measured
c) Demonstrate the considerations of costs and benefits of different risk management strategies
d) Analyse how different risk management strategies can be applied with reference to different situations and characteristics of risk
2. Suggested teaching schedule
Content PowerPoint Remarks Estimated time
1 Convenience store robbery 2-3 Introductory case
5 mins
2 The risk management process – identify the risks
4-5 3 mins
3 The risk management process – analyse the risks
6 2 min
4 The risk management process–develop and evaluate different risk management strategies
7-11 15 mins
5 The risk management process – select the risk management strategies
12-15 10 mins
6 Implement and evaluate 16 3 mins
7 Conclusion 17 2 mins
Total 40 mins
6
Teaching plan for lesson 6:
Insurance concept – an overview
1. Objectives:
Upon completion of the lesson students should be able to:
a) Describe the meaning of insurance from different perspectives b) Illustrate different important concepts of insurance with examples
c) Explain different impacts of pure risk on business before and after the occurrence of hazards
d) Demonstrate how insurance can help cover different direct and indirect losses involved in business operations with examples
e) Apply the rules for considering whether insurance should be taken out or not
2. Suggested teaching schedule
Content PowerPoint Remarks Estimated time
1 Fire in mini-storage warehouse 2-3 Introductory case 5 mins
2 Meaning of insurance 4 2 mins
3 Common terms in insurance 5-8 10 mins
4 Impacts of pure risk on business 9 3 mins
5 Risks commonly faced by business – direct loss
10-11 6 mins
6 Risks commonly faced by business – indirect loss
12 4 mins
7 Risks commonly faced by business – liability
13 5 mins
8 Considerations before taking out insurance
14 3 mins
9 Conclusion 15 2 mins
Total 40 mins
7
Teaching plan for lesson 7:
Common types of insurances for business I
1. Objectives:
Upon completion of the lesson students should be able to:
a) Describe the meaning and application of comprehensive insurance for business b) Distinguish the coverage of and conditions of different types of motor insurance c) Illustrate the implications of motor insurance on business
d) Explain the meaning and coverage of fidelity insurance
2. Suggested teaching schedule
Content PowerPoint Remarks Estimated time
1 Introducing topics to be covered
2 2 mins
2 Comprehensive insurance for business
3 2 mins
3 Risk of operating a company owned vehicle
4 3 mins
4 Motor insurance: coverage and situation
5-7 10 mins
6 Implications on business 8-9 8 mins
7 The autonomous vehicle 10-12 Case discussion 8 mins
8 Fidelity insurance 13 5 mins
9 Conclusion 14 2 mins
Total 40 mins
8
Teaching plan for lesson 8:
Common types of insurance for business II
1. Objectives:
Upon completion of the lesson students should be able to:
a) Explain the meaning of liability to business and various common areas in which business liability may occur
b) Describe employer’s liability to employees’ compensation
c) Explain the meaning and implications of employees’ compensation insurance d) Illustrate how employees’ compensation insurance can be applied under different
situations with examples
e) Analyse how the rising insurance costs of employees’ compensation can be tackled f) Describe the meaning of public liability insurance and its applications in business
2. Suggested teaching schedule
Content PowerPoint Remarks Estimated time
1 Court case on industrial accident 2-4 Introductory case 8 mins 2 Liability insurance and common
types of liability for business
5-6 5 mins
3 Common types of liability insurance for business
7 3 mins
4 Employees’ compensation insurance
8-10 8 mins
5 Increasing industrial accidents in Hong Kong
11-12 Case discussion 8 mins
6 Can the liability on employees’
compensation be transferred
13 3 mins
7 Public liability insurance 14 3 mins
8 Conclusion 15 2 mins
Total 40 mins
1
‐ Start the lesson and mention the topic of this lesson
‐ Use a real‐life case as an introduction
‐ Explain the silver bond according to the contents in the PowerPoint
2
‐ Tell the students that the bond turned out to be very popular
‐ Ask why the bond is so popular
‐ Try to bring out the idea of risk
‐ Explain that different people or different organizations may have different preference to risk
‐ Meanwhile, no body would like to take risk without any preparation no matter on avoidance or taking it as a trade‐off
3
‐ Explain the topics to be covered in this lesson
4
‐ Risk means the possible consequence of an event or situation is subject to chance, a random situation
‐ One of the possible consequence of the situation could be worse than what we expect
‐ After all, as there is no formal definition of risk, it is popular and widely accepted to interpret risk as a situation in which the outcome of an event is uncertain that a loss would be incurred
5
‐ Ask students what difference that they can find between these two kinds of risk
‐ Highlight that risk in running a business could end up with a profit or a loss
‐ Worse than expected could mean the amount of loss incurred larger than expected
‐ Risk in operating a machine could be having a breakdown or having no breakdown
‐ Worse than expected should be having an accident
6
‐ Going back to the Silver Bond case, what is A and B?
‐ A: possible consequence – get the interest or cannot get the interest
‐ B: possible consequence worse than expected – the bond defaults
‐ Since the occurrence of A and B is close to zero, the bond can be said as risk‐free
7
‐ There are many risks that we may encounter both as an individual or as a company
‐ There could be some risks which are very serious but many others with minor impact
‐ Before deciding how to deal with them, it would be better to find out how serious they could be
‐ There are two components in assessing a risk
‐ The probability that the risk could happen and the size of damage that the risk could cost once happened
‐ If a serious earthquake happens, the consequence could be catastrophic. But since the chance of having it in HK is nearly impossible, the magnitude of this risk to HK is minimal or negligible
‐ A way to calculate the magnitude of the risk is to multiply the probability that is between 1 and 0 by the size of potential damage
‐ Given the same size of possible damage, the higher the possibility of the risk, the greater the magnitude of the risk.
‐ In case the probability is 1, it would not be a risk since its happening is not by chance but certain
8
‐ Based on the calculation, there could be four possible situations
‐ Low probability and small size of damage means lower risk e.g. freezer at a convenience store is out of order due to electricity cut
‐ High probability and large size of damage means higher risk e.g. people engaged in high risk job such as a stuntman, getting hurt in a
‐ High probability and small size of damage means the risk is uncertain e.g. shoplifting in a Jewel shop
‐ Low probability and large size of damage also means the risk is uncertain e.g.
earthquake in Hong Kong
9
‐ There are different classifications of risk and one of the most common way is to differentiate the risk into pure risk and speculative risk
‐ Pure risk refers to those cases in which the outcome of an event could only be a loss or without a loss
‐ Speculative risk refers to those cases in which the outcome could be a gain or a loss
‐ Students could be asked to raise examples of pure risk and speculative risk and justify their answer according to the definition mentioned above
10
‐ Why it is important to separate pure risk from speculative risk
‐ Would it be very arbitrary?
‐ Ask students to raise different ideas about why
‐ E.g. some may say speculative risk is necessary since it is commonly known that the higher the risk the higher the return
‐ Therefore certain level of speculative risk is inevitable though excess risk relative to expected return should be avoided
‐ However, pure risk can only result in a loss if it is not being well‐managed
‐ Thus, pure risk need to be minimized at acceptable costs in whatever cases
11
‐ Following the logic in the previous PowerPoint, sometimes speculative risk is inevitable but pure risk should always be minimized
‐ A major reason to distinguish pure risk from speculative risk is that speculative risk is generally not insurable while many pure risks can be
‐ Normally insurance is only for pure risks and speculative risks are generally not covered
‐ It should be mentioned that even for pure risks not all are insurable
‐ Whether the pure risk is insurable or not will be discussed in details in later lessons
12
‐ Other differences between pure risk and speculative risk:
‐ Speculative risk usually involves many different factors / complicated situations. Such risk will lead to a gain as well as a loss
‐ Minimization of speculative risk is very complicated and difficult. It would involve many departments and operations in the process
‐ Since there may be gains in some cases, it may be worthy for taking such risk
13
‐ Comparing with the previous PowerPoint:
‐ Relatively pure risk is based on simpler factors and situations
‐ Normally the probabilities of occurrence of pure risk can be predicted
‐ Measures can be taken to reduce the pure risk
‐ Management of pure risk can be confined to some departments
‐ Thus, management of speculative risk vs pure risk is very different
‐ Furthermore, in many cases pure risk would not only affect the party involved but also the general public e.g. when the factory is on fire the neighborhood would be affected too
‐ Thus, pure risk also involves a social concern
14
‐ Theoretically the buying of Silver Bond could be a speculative risk since there could be a gain (getting the interest) or a loss (the bond defaults) though the chance of a loss is close to zero.
15
‐ We know that there are pure risk and speculative risk, and it is the pure risk that management of risk would mainly concern about
‐ Now we go further to know more about the different kinds of pure risk faced by a business
‐ There are mainly three major types of risks: personal, property and liability
‐ Personal: mainly due to illnesses or accident of employees and key staff of the company
‐ Property: direct and indirect losses due to damage of properties
‐ Liability: harms to other person or damage to other people’s property owing to the firm’s carelessness
16
‐ Describe in details about the causes mentioned in the PowerPoint e.g. product safety refers to product defects or harmful ingredients
‐ Pure risk of property refers not only to the direct loss associated (e.g. the fire may burn down the whole premise) but also the indirect loss incurred (e.g. no place to continue the business for a period of time)
‐ Ask students to raise different examples of pure risk under the three categories
17
‐ Ask students to have a discussion on the case shown in the PowerPoint
‐ For pure risks:
Personal: injury, bad health of staff due to addiction in playing the game Property: delivery van crashed due to bad health of staff
Liability: trespass to private area of the business by stranger who is playing the game (lawsuit to Nintendo)
‐ For speculative risk:
‐ Nintendo may get high profit by launching the Pokémon Go
‐ Some firms pay for having the Pokémon located in their premises in order to increase traffic may earn handsome profit
18
‐ Ask students to highlight what they have learned in this lesson
‐ Meaning of risk: different definitions of risks covered
‐ Magnitude of risk: probabilities and size of damage of the risk
‐ Differentiation of pure risk from speculative risk with examples
‐ Importance to distinguish pure risk from speculative risk
‐ The kind of risk that traditional risk management mainly concern
19
1
‐ Start lesson 2 by mentioning that there is other classification of risk apart from the pure and speculative risk
‐ That is insurable vs non‐insurable risk
‐ It is important to know about this classification especially when many risks are supposed to be dealt with through insurance
‐ Before going on, use the real‐life case from above to aid illustration
‐ Ask the students whether it is possible for the company to insure against the loss due to such damage on its image
2
‐ Explain the topics to be covered
3
‐ Recall what have been learned in lesson 1 about one of the major differences between pure risk and speculative risk
‐ Normally insurance is only for pure risk
‐ Speculative risk are generally not under insurance coverage
‐ It should be mentioned that even for the pure risks not all of them are insurable
‐ The reason for some pure risks are insurable but some are not will be discussed in coming ppt.
4
‐ The meaning of insurable risk is the risk that the insurance company will provide cover for
‐ It is important to distinguish what risk is insurable and what risk is non‐insurable
‐ It is because one the major means to deal with risk is through insurance
‐ As mentioned before pure risk is normally insurable with some exception, while speculative risk is generally not insurable
‐ The examples shown are those pure risks that are insurable, and those speculative risks that are non‐insurable
5
‐ What constitute insurability especially when not all pure risks are insurable?
‐ Five criteria are used to examine whether certain pure risk is insurable or non‐
insurable
‐ Purely by chance, random cases
‐ Measurable loss
‐ Large, significant loss
‐ Law of large numbers
‐ The loss should not be devastating
‐ The criteria list is by no means exhaustive but is generally applied
6
‐ Students may argue that people may take deliberate action in order to get the benefit of compensation from insurance (e.g. intentional personal injuries or destruction to property)
‐ In such case, once proved, the insure will not get the compensation, and may be liable for imprisonment too
7
‐ The insurer needs to know the value of the potential loss so that it can determine the premium
‐ The introductory case used in the beginning of the lesson can help illustrate this point
8
‐ The rationale of having this criteria is that if the loss value is too small, the
administrative costs involved in the calculation may even higher than the loss value
‐ That is why many insurance companies will apply deductibles
‐ Of course, whether the amount is large enough or not could be subjective in some cases
‐ Ask students to raise other examples
9
‐ It will be difficult for insurance as it is mostly difficult to apply the law of large number relating to a change in government policy
‐ It is because the policy of a government in one place can be very different from the others, and the effectiveness on each policy is indeed greatly affected by many different factors over different periods of time
‐ Students may argue about insurance against harms to the beautiful leg taken by the a movie star (shown on a TV series)
‐ It may be because the insurer can join with many other underwriters undertaking such case so that the risk can be spread.
‐ Also, the premium could be very high to protect the insurer
10
‐ In fact, the main point is that the insurer needs to maintain a situation in which not all or majority of the insured will be affected at the same time
‐ Thus being geographically scattered could be one of the ways to spread the risk
‐ The risk should not be catastrophic otherwise the insurer cannot survive
11
‐ Students are divided into groups for discussion
‐ The key would be whether the loss is measurable
‐ Since it difficult to measure the loss on image arising from the boycott in monetary term, the probability of it got insured would be slim
12
‐ It is not easy to determine definitely what risk (pure risk) is insurable or non‐insurable since many new risks keep appearing and at the same time many new insurance products are being developed
‐ Political risk is generally regarded as something very difficult to get insured
‐ However, new products are developed lately to cover different aspects of political risk e.g. asset seized by new government, default payment due to political disturbance
‐ Still many other aspects of political risk are not well‐covered
13
‐ Review all the topics learnt in this lesson
‐ Another major classification of risk: insurable vs non‐insurable risk
‐ Criteria for insurability and examples
14
‐ Topic of the lesson
‐ There are three lessons altogether on the topic of risk management
‐ This is the first one
1
‐ Illustrate the real‐life situation shown in the PowerPoint to stimulate students’
interest in how risk can be prevented or reduced.
‐ Ask students to suggest what could have been done wrong for having the contaminated pig being distributed to the public
‐ Possible causes:
‐ People: unable to follow the procedure or negligence
‐ Procedure: not following the prescribed procedure, or the procedure is not practical
‐ Method: random selection error, or test sample not large enough
‐ Equipment: errors in testing equipment
2
‐ Explain the topics to be covered in this lesson
‐ They are:
‐ Meaning of risk management
‐ Why risk management is important
‐ Start exploring some risk management strategy
3
‐ Emphasize that traditionally risk management focuses on pure risk
‐ Recently people start talking about total risk management and intend to include speculative risk under the umbellar of risk management, because they think that the delineation between the pure risk and the speculative risk is arbitrary
‐ Moreover, since a company should try to minimize all kinds of risk it is facing, speculative risks should also be included
‐ Even so, it should be noted that the job of managing pure risk is very different from that of the speculative one as mentioned in previous lessons, it would be difficult for the same team of people to handle both types of risks
4
‐ The task of risk management is to identify and analyze different pure risks involved, and apply different strategies to minimize them
‐ The objective is to minimize the risk faced by the company and guarantee that the company can still in operation even suffering from the loss associated with the risk
5
‐ It is a brief history about risk management
‐ Traditionally people treat risk management as insurance management
‐ After the Second World War people started to note that risk is not purely by chance
‐ There are reasons and causes behind different kinds of loss
‐ Actions can be taken to prevent or at least to reduce the risk
‐ Though risk cannot possibly be totally eliminated but it is possible to manage it so that the costs can be minimized
‐ Therefore rational and systematic approach to deal with risk is helpful
6
‐ There are four commonly applied risk management strategies, namely:
‐ Risk avoidance
‐ Risk prevention/reduction
‐ Risk transfer
‐ Risk assumption/retention
‐ They can be classified according to different criteria
‐ Some strategies are aiming at preventing the chance or reducing the severity of the risk before the hazard happens
‐ These strategies aim on control and would be in the domain of operation management
‐ Some other strategies are aiming for protecting the company after the hazard taken place
‐ These strategies concern more on the financial aspect and their major objective is to minimize the loss the company will suffer and guarantee that the company can still survive even after those damages
7
‐ The risk management strategies can be divided into two types according to their purpose and management functions adopted.
8
‐ Risk reduction strategy
‐ Mainly two major aspects: reduce the chance of happening and reduce the loss when the hazard really takes place
‐ Some textbooks specifically refer reducing chance of happening as risk prevention while reducing the costs of loss as risk reduction
‐ Examples of reducing occurrence probability e.g. employing only qualified employee for operating specialized equipment
‐ Examples of reducing costs of loss when happening e.g. never put all valuable assets together in one place
9
‐ There are many different areas that a company can work on to prevent or reduce risk
‐ One of the ways is to follow the fish‐bone diagram developed by Ishikawa for locating different major areas in which the prevention/reduction work can take place
‐ The three common areas for risk reduction are namely physical, people and procedure/method
10
‐ Using a restaurant as an example to show how people may lead to loss and what measures can be taken to prevent the risk
‐ Ask students to suggest examples of risk that are caused by people (e.g. avoid
customer got hurt by careless waiter) and suggest ways to improve the situation (e.g.
looking for a more careful candidate in the recruitment process, or to have a clearer guidelines in serving customers)
11
‐ Using a restaurant to illustrate how equipment can be a source of risk and how such situation can be improved
‐ Ask students to suggest other example in which equipment can be a source of risk e.g.
unsuitable cookware, worn‐out table or chair etc
‐ Suggest ways to improve e.g. have regular checking or replace the broken equipment
12
‐ Using a restaurant as an example to illustrate how environment could be a source of risk and how it can be fixed
‐ Ask students to suggest other example in which environment can also be a source of risk e.g. dim lighting, dangerous floor layout, noise etc
‐ Suggest ways to improve e.g. suitable level of lighting, improve floor plan etc
13
‐ Based on the case of a restaurant illustrate how material can be a source of risk and how it can be fixed
‐ Ask students to suggest other possible situations in which material can also be a the source of risk e.g. outdated foodstuff, contaminated foodstuff etc
‐ Suggest ways to improve e.g. standard procedure in food storage and disposal
14
‐ Using a restaurant as an example to illustrate how insufficient preparation can be a source of risk and how it can be fixed
‐ Ask students to suggest other possible ways through which method can be a source of risk e.g. some cooking method could be dangerous especially for some less skilled employees, ways to deliver dishes
‐ Suggest ways to improve e.g. change the method or only allow skilled employees to use those methods
15
‐ Using restaurant as an example to illustrate how procedure can be a source of risk and how it could be fixed
‐ Ask students to suggest other cases in which procedure can also be a source of risk e.g. collection procedure on kitchen waste may lead to over‐piling of dishes in the same location etc
‐ Suggest ways to improve e.g. refine the procedure by having another location for storage to avoid over‐piling
16
‐ It should be noted that a risk could be due to many different possible causes
‐ However, some causes are more dominant than the others
‐ The pareto analysis helps to identify which causes are critical by using statistics to show which type(s) of cause responsible for the highest frequency of the occurrence of loss
‐ E.g. human error is the most frequent cause leading to accidents in the kitchen, then more training or better recruitment should be applied
‐ The second important concept is that strategic effort should be directed to risk areas paramount to the success or survival of the organization
‐ E.g. food safety is one of the most important consideration in operating a restaurant, greater effort should be applied to assess risks in this area and corresponding
prevention and reduction measures should be developed
17
‐ Sometimes people believe that it would be the best if all the risk can be prevented or reduced beforehand
‐ In fact, we should apply a cost benefit analysis in this aspect
‐ Several factors need to be considered:
‐ The costs of loss if no prevention/reduction measures taken
‐ The costs of prevention/reduction measures
‐ The costs of other management strategies
‐ The costs that could be reduced after applying the prevention/reduction measures
18
‐ Revisit all the topics covered
‐ Review the concepts and main points mentioned in previous PowerPoint
19
‐ Mention that it is the continuation of the last lesson that the other 3 risk management strategies would be introduced
1
‐ Ask students what are the potential risks caused by cyber attacks and what could be the losses
‐ Discuss with students how can these be managed
‐ Prevention and reduction is a normal strategy
‐ However, it seems not possible to eliminate all the risk
‐ Thus, what other risk management strategies can be applied
‐ Introduce the content of the next PowerPoint slide
2
3
‐ The second risk management strategy is risk avoidance
‐ Need to emphasize that it is a passive approach since taking risk is one of the condition for doing business
‐ It is commonly known that risk is proportional to return
‐ Therefore this risk management strategy should only be the choice if there is no other acceptable way to reduce risk and that the risk is too much for the company
4
‐ Illustrate different examples of avoidance strategy
‐ Ask students to raise other examples of avoidance
5
‐ The other two risk management strategies emphasize on how to deal with the loss after the damage has occurred
‐ There could be two ways to prepare for such unwanted situation, one is to having risk transferred to a third party, and the other is to assume the risk by the company itself.
In both cases, the objective of the strategies is to enable the company to keep operating even after the damage has happened
‐ In short,
‐ Risk transfer: some other party will take the whole or part of the loss through some prior arrangements
‐ Risk assumption: company/organization/individual will take all the loss
6
‐ The third risk management strategy is risk transfer
‐ A very common way of risk transfer is through insurance
‐ Other ways include shifting certain activities to other party so that the risk will be borne by another party e.g. subcontract the transportation function so that all risks related to transportation can be shifted, or agreeing with suppliers that the product or parts will not be delivered until the last moment so that all the risks related to storage will be shifted to the suppliers.
‐ Sometimes, the firm may shift the financial burden to another party by contract e.g.
Having a term in the contract that the buyer has to bear all the losses arising from the damages of a product upon delivery
7
‐ Of course, when thinking about taking insurance the risk should be insurable and that is why knowing what is insurable and what is non‐insurable is very important
‐ Also, insurance is not a must though it is a common strategy used to deal with risk, a cost benefit analysis is important when considering taking out insurance against certain risk
8
‐ The above is the forth risk management strategy
9
‐ No matter how the loss could be dealt with by the other risk management strategies, the remaining loss (if any) will be left to the business itself
‐ Risk assumption is actually a very common risk management strategy because for most of the time, risk avoidance may not be practical particularly for business which is already in operation; and the risk prevention and reduction measures fail to remove all the risks
‐ There are also limitations to risk transfer in many cases e.g. some risks even pure are non‐insurable
‐ Many risks actually exist but are unrecognized by business,
‐ All of these risks would fall onto the business in the end
‐ It should be noted that the diagram is just to show that risk assumption is always the residual strategy but it does not mean that it is the procedure or steps that risk management should go through in choosing the suitable risk management strategy
10
‐ We need to go through a cost benefit analysis to determine which risk management strategy is more appropriate
‐ Sometimes, for some risks we may find insurance too expensive even it is available (e.g. insurance on political risk in some unstable countries)
‐ For some very large corporations such as large international retail chains, they can apply self‐insurance, i.e. set aside some funds for any potential loss that occurred to its branches. The fund can earn interest when no loss occurs. It is just similar to the case of an insurance company
11
‐ The risk management should try the best to avoid unintentional risk assumption
12
‐ Generally there are two ways to apply risk assumption strategy
‐ Assign a specific fund could be an emergency fund for covering some loss caused by some specific risks, or contribute yearly to build up a reserve fund which is interest bearing for the purpose of covering some specific risk (self‐insurance)
‐ Other financial arrangement could be creating an insurance company by the firm itself for not only covering the firm’s own risk but also other businesses' risks; or treating the potential loss as part of the running costs or expenses of the business
‐ For large corporations particularly those with large cash reserves, risk assumption could be a good option
‐ For small company which is short in cash, being totally uncovered could be a disaster
13
‐ For self‐insurance or creating a insurance company by the firm itself, it would be only applicable to large corporations especially those with strong financial supports.
‐ The feasibility of assuming the losses of risk as part of the running costs depends on the nature of the risk.
‐ For some insignificant losses such as loss of stationeries in office, many firms can adopt such strategy. However, if the loss is expected to be large, the company needs to be careful.
14
‐ Discuss with students on the possible methods under each risk management strategy e.g. transfer: through insurance or outsource the whole section of IT to third party and make agreement that the outside party will bear all the risks
‐ After all if the above measures are not quite feasible the company may need to bear the risk by itself
15
‐ In fact, normally companies will adopt combination of risk management strategies to deal with the risks they are facing
‐ Ask students why it is basically not quite possible to apply a single risk management strategy
16
17
‐ Review the concepts covered in this lesson with special attention to the following points:
‐ Strategies preparing for what would happen – refers to those strategies mainly on financing the losses that could arise
‐ Risk transfer: need to know the meaning of risk transfer and by what ways that the risk can be shifted, lastly some considerations that need to be taken when taking out the insurance
‐ Risk assumption: need to know its meaning, what are the ways that could be used for absorbing the risk and under what conditions that such strategy would be more appropriate
‐ Lastly, it should be emphasized that usually a combination of strategies will be adopted to deal with company risks
18
1
‐ Explain the case and ask students to discuss on how the convenience store can design its risk management strategies
‐ First, students need to identify the risks that convenience store has to face from robbery and shoplifting
‐ Then, try to analyse the seriousness of the risks as follows
‐ Shoplifting always happen but not severe
‐ Robbery has become common but the loss of money is not too much
‐ However, the loss of life is a very serious one although it is less frequent
‐ Students can then try to figure out what strategy(ies) would be appropriate for each of the above risk(s).
‐ For shoplifting, risk assumption would be better since the loss tends to be minor, it may not be insurable. Also, prevention/reduction can be applied as supplementary strategies to reduce the frequency of occurrence.
‐ Life loss is very severe but should not be frequent, may be insurance is better, of course prevention/reduction strategies such as training of storekeeper would be helpful
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‐ The process of risk management:
‐ First, to identify possible risks, since different companies have their own operation process and different business environment, they need to identify their own risks, among those in common.
‐ Then the risk need to be analysed to find out how serious they are
‐ After that, different risk strategies will be developed (i.e. the four strategies covered in previous lessons) and their benefits and costs will be considered
‐ Risk management strategies will be chosen according to the different risks and their situations faced by the company
‐ Strategies will then be implemented, and after certain period of time evaluation will need to be conducted
‐ The whole process will repeat again in view of new situations faced by the company over time
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‐ The first step is to identify the risks involved
‐ The check list provided can help to find out the kinds of risks that a company may face, yet, the items are just examples and should be far from exhaustive
‐ Ask students to raise examples according to the check list by specifying a context e.g.
a fast food shop. Examples are as follows:
‐ Employee health would affect the business of the restaurant
‐ Direct loss: refers to damage to the premise e.g. fire in the kitchen
‐ Indirect loss: refers to something like disruption of business e.g. no business after the restaurant is destroyed by fire
‐ Liability refer to risks causing losses to other party due to the fast food shop’s negligence e.g. unsafe food, slippery floor etc
‐ Teacher may try other example such as hotel, fitness center etc
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‐ Some tools can be used to help identify the possible risks faced by the company
‐ Going through the whole operation process is good since different company may have different operating process and thus would be exposed to different kinds of risk that may not be similar to other company even in the same trade
‐ Insurance policy checklist is helpful since it includes many possible risks, yet, the company should also beware of some risks that are specific to its business
‐ In such case, questionnaire can be developed for risk finding
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‐ After identifying the risks faced by a company, the severity of these risks should be assessed for designing corresponding risk management strategies
‐ The analysis should emphasize on how frequent that the loss would occur and the size of the loss would possibly be incurred
‐ Normally we will go for the largest possible loss in the estimation
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‐ We need to find out what strategy is good for which kind of risk
‐ The four risk management strategies mentioned before have their benefits and costs
‐ In developing the risk management plan, different risk management strategies should be evaluated thoroughly with respective to their costs and benefits
‐ For risk avoidance:
‐ Benefits:
‐ the company can be free from any risk associated from that particular type of business when avoidance strategy has been applied e.g. no political risk will be involved if the company avoid doing business in politically unstable places
‐ No other strategies will be needed as all risks have been avoided
‐ Then the company can focus on other aspects of the business e.g.
strengthening their businesses in politically stable countries or places
‐ Costs:
‐ In reality it is not possible to avoid all risks e.g. even in politically stable place there still could be political risks
‐ When the risk is avoided it would mean quitting the business or giving up opportunities
‐ Sometimes it is not possible to quit some areas or aspect of business if the company has been already operating in those areas or aspects
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‐ For risk prevention/reduction strategy
‐ Benefits:
‐ Help to reduce the chance and size of the loss
‐ Good prevention/reduction measure can help reduce insurance premium or less burden for risk assumption
‐ It helps to develop a good culture on preventing and reducing risks
‐ Costs:
‐ It could be quite costly when implementing prevention and reduction measures e.g. equipment, environment and people
‐ Since it is impossible to eliminate all possible risks just through prevention and reduction measures. Other strategies are still needed and costs would be invloved
‐ There is always room to improve, thus it is hard to say when and how is good enough
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‐ For risk assumption strategy:
‐ ‐Benefits:
‐ No need to pay for the premium
‐ Since insurance is based on large number of insured parties spreading the risk the premium is based on the general coverage. Once there is any careless insured party committing error and leading to huge losses the premium could be increased and the other decent parties will be unduly affected
‐ Premium also includes insurer’s administrative costs and their expected profit and therefore would be higher than the costs of self‐insurance maintained by the involved company itself
‐ Company would emphasize on good practices for preventing and reducing the chance of loss if risk assumption is applied
‐ Costs:
‐ It is hard to say, sometimes there could be catastrophic loss and the company has to bear without coverage from insurance company
‐ Prevention and reduction measures would be under greater pressure and more costs will be involved to safeguard any possible loss
‐ The company might be troubled by the uncovered risky position and that might affect other strategic decisions
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‐ For using risk transfer (insurance) strategy:
‐ Benefits:
‐ Loss will be covered
‐ Company would be free and can have greater motive to pursue more challenging objectives and opportunities
‐ No great pressure on strict risk prevention and reduction measure
‐ Costs:
‐ Premium costs could be high especially when some disasters had just happened
‐ Some risks could be non‐insurable and still need to be taken care of
‐ People tend to be careless and pay less attention to prevention and reduction of the possible loss
‐ It is still a possibility that the insurer may not be able to pay off especially when the loss is sky‐high
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‐ For risk transfer strategy:
‐ Benefits:
‐ No premium is needed
‐ Sometimes it is less costly to shift the activity that the company is not familiar with to subcontractor. It is because the subcontractor who is
specialized in doing that kind of activity can do the same job at a much lower costs
‐ No worry on this aspect of business and the firm can be freed to focus on its major domain
‐ Costs:
‐ Some earning will be shifted to sub‐contractors, or the party who bear the financial burden
‐ The sub‐contactor or the contracted party may default when loss really occurs, the final burden could be still on the company itself
‐ Costs would be involved to search, negotiate, and monitor the contracted party for taking up the risk from the company
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‐ Before implementing the plan, a careful look at the characteristics of risk under each management strategy is deemed appropriate
‐ Types of risk that are suitable for applying risk avoidance strategy:
‐ High possibility of having the loss and the size of the loss is huge The risk is difficult or basically not quite possible to be reduced even with good efforts in prevention or reduction
‐ No insurance or the premium is extremely high and that make it unworthy to go ahead
‐ E.g. doing business in a highly political unstable area or the place deeply troubled by serious epidemics
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‐ Types of risks suitable for reduction strategy:
‐ Frequency of occurrence is high but the loss from which is not too big. In such case, taking out insurance for the risk may not be justified because the administrative costs incurred may be higher than the compensation received for the loss
‐ Risk assumption strategy is not preferred since the loss accumulated from each occurrence may not be small. Therefore, adopting risk reduction strategy is the way out to reduce the chance the size of loss
‐ Company which has the technology, personnel and financial capacity to launch effective prevention and reduction measures is more able to reduce risk
‐ The reasons for the loss are generally traceable and the chance of happening predictable, then the prevention and reduction measures could be effective
‐ Students can suggest examples according to the conditions specified e.g. industrial accidences, product defects etc
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‐ Risk can be transferred if they are:
‐ Chance of happening infrequent by once happens the loss could be huge.
‐ The premium is acceptable as the frequency is not too high and of course the risk itself is insurable
‐ The risk cannot be reduced substantially by only applying prevention and reduction strategy and external coverage is needed
‐ Students can give examples e.g. severe fire or typhoon attack
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‐ Risk assumption is suitable when the risk is under certain situations:
‐ Loss is very minor and the chance could be infrequent
‐ If the chance is in infrequent and the loss is very negligible there is no need to pay attention to it assumption by default
‐ When the insurance cost is relatively more expensive it would be better self‐insured, of course it only happens for large corporation that has a large number of exposures and can afford self‐insurance financially e.g. large retail chain can self insure against hazards like fire by setting up its own insurance company
‐ For some sorts of risks that can be largely reduced through prevention and reduction strategies, risk assumption as a complementary is acceptable e.g. convenience store has CCTV and close communication with police plus very few cash kept in the register
‐ Of course, it is difficult to say the risk has really effectively reduced since risk is always something unknown
‐ Also, as mentioned before when there is no other risk management strategy feasible risk assumption is the only choice.
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‐ After choosing appropriate risk management strategies the company will need to put them into practice by assigning the tasks and specifying the responsibilities to
concerned people and department
‐ After implementing the strategies for a period of time there should be periodic review of the situation
‐ There might be some problems arising or new situations appear e.g. new kinds of risk such as cyber attack and political problems
‐ Then the whole process of risk management will be repeated again
‐ The company need identify all possible risks especially those emerged due to new environmental changes, analyse the risk and design suitable risk management strategies accordingly, then put them into operation for some time and lastly review and evaluation again
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‐ Review the major topics covered in this lesson and summarize what have been covered in each topic briefly
‐ Ask students if there is any questions for any of the topics covered
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‐ Introduce the title of this lesson
‐ Insurance is important for risk management
‐ It is because for many small and medium firms, insurance tends to be their major means for handling business risk since they may not have enough scale and capital to apply risk assumption, while risk prevention and reduction would demand a lot of efforts and involve expertise.
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‐ Explain the case contents: the incident happened in Hong Kong
‐ Ask students what is insurance?
‐ Students may answer that it is a transfer of risk or spread of risk among similar risk‐
takers
‐ When and why business needs insurance?
‐ There could be different answers e.g. insurance is for something that may not happen so often but could mean a lot of damages
‐ But then why the multi‐storage warehouse did not buy the insurance?
‐ That would lead to the point that people usually overlook potential risk
‐ It is particularly true for individual and small businesses
‐ In fact, risk management is important and not just for large corporations but also to everyone including individual, family and organization of whatever size
‐ Also insurance is the most common form or the minimum form of risk management that should not be overlooked
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‐ Explain the topics that would be covered in the lesson
‐ Firstly the meaning of insurance will be introduced so that students can have a better idea about what insurance is though it is actually a very common term
‐ Insurance in fact involves many technical aspects and therefore different terms and their meanings plus implications should be known
‐ Then we will move to explain some common risks in running a business that could usually be handled by taking out insurance
‐ However, insurance is not always the first priority in managing risk, some considerations have to be made before taking out relevant insurance policies
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‐ The operation of insurance is that you pay the insurance company to cover certain risk e.g. fire happened in your factory
‐ Once the loss occurs you can claim back the compensation so that the loss would not jeopardize your business from continuing operation
‐ To generalize such process, it can be conceptualize that for individual or firm, insurance is actually a kind of risk transfer through which the risk can be shifted to another entity who would bear the loss incurred for a premium
‐ For society, insurance would be risk sharing through pooling all the possible cases together
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‐ Explain the meanings of the three terms in the PowerPoint which are self‐explanatory
‐ Provide examples for illustration wherever applicable
‐ May ask students to give examples first
‐ E.g. for principle of indemnity: there is a theft in the office and the actual value of loss is $10,000 while the coverage limit is $100,000, then only $10,000 will be compensated
‐ E.g. for insurable risk: generally five criteria can be used to determine whether a pure risk is insurable. For example acompany car accident can be insured if it fulfills the large numbers rule; the loss incurred is quite large but not catastrophic; the
occurrence is purely accidental; and the loss can be readily measured in monetary terms
‐ E.g. foradverse selection: a company doing transportation business in a war area would find it difficult to get insurance
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‐ Explain each term according to the PowerPoint:
‐ Meaning of insurance policy and underwriting are quite straight forward
‐ For insurable interest: need to emphasize that it is also a condition for getting insurance. Normally insurance could not be taken out if no loss is incurred to the insured in an event. However, insuring for the life of family members is acceptable since the loss could be on the insured though he or she may not suffer from death.
But in case when the hazard happens the insured will not suffer any loss (in monetary terms) out of it e.g. the fire happened to a totally unrelated premise, it would be difficult to take out relevant insurance
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‐ Meanings of coverage limit and premium are also self‐explanatory
‐ For deductible: need illustrations with some examples e.g. in an insurance policy covering car collision with $2000 being the deductible, suppose the car collides and a loss of $5,000 is incurred, the insured need to bear the first $2,000, before the
insurer will pay for the rest
‐ The major purpose of having deductible is to reduce the claim for insignificant amounts which is considered administrative uneconomical
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‐ Although insurance is a very common form of risk management, it should also be justified with reference to cost benefit analysis
‐ Thus if the cost of insurance is too high, business would probably consider other forms of risk management
‐ In fact, in order to get more business, insurers are actually competing on pricing though it could be quite risky
‐ As for actuaries, meaning of it is also self‐explanatory
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‐ Finally we come to conclude on how pure risks affect business
‐ It can be on two aspects i.e. before the hazardoccurs and after the hazardoccurs
‐ Before the hazard occurs:
‐ Costs need to be involved for adopting different risk management strategies to deal with the risks e.g. insurance premiums, opportunity costs of keeping reserve for risk assumption and costs involved when applying risk
prevention/reduction strategies
‐ Apart from actual costs, pure risk also poses uncertainties that may annoy company management – mental anxiety
‐ It arises because there is always some sorts of risk overlooked by the company.
When such case happens the company will be exposed to risk unprepared. Of course risk assumption can take care of it but it is surely not desirable. Such anxiety would deter the investment or development plans of the business
‐ After the hazard occurs:
‐ Direct loss such as damage to property and indirect loss such as loss of sales and profit to the company will be incurred
‐ Besides, there may have losses from liability to other people or their properties
‐ That may include compensation to people died or injured/damage of properties.
Sometimes, legal costs will also be incurred
‐ Hopefully all these costs could be met by insurance or other risk transfer arrangements,if not, the company needs to absorb all these costs on risk overlooked before
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‐ After explaining the common risks faced by business in operation, now move on to introduce losses that could be handled by insurance
‐ There could be direct loss and indirect loss to a company
‐ Common causes for direct loss:
‐>Damages to property or contents in the property by fire and other natural disasters
‐> Loss due to fraudulent acts of employees, robbery and accident
‐ Relevant insurance could be taken out for protection
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‐ Direct loss could also lead to indirect loss to a company
‐ For example: the damage to the premise of a restaurant would lead to indirect loss such as closure of premise for certain period of time
‐ Business interruption could have short term and long term impacts on the business
‐ In normal case, lost profit and payments of unavoidable fixed costs can be protected by taking out relevant insurance since the losses tend to be quite measureable
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‐ Another kind of risk that a company usually face is the claim from third party for liability
‐ That could be arisen from any third party getting injured or his/her property damaged due to the fault of the insured company or its employees
‐ The examples can be used to illustrate different possible kinds of liability
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