Financial Risk Management

• Financial risk management identifies, analyzes, and addresses financial risks to protect an organization's stability and profitability.

Core Aspects of Financial Risk Management

• Identification: Recognizing potential financial risks.
• Analysis: Evaluating the likelihood and impact of risks.
• Treatment: Implementing strategies to reduce or transfer risks.

Types of Financial Risks

• Financial risk management focuses on mitigating risks related to an organization’s finances using tools like hedging and derivatives.
• Interest rate risk involves volatility due to changes in interest rates, including basis, options, term structure, and repricing risks.
• Commodity price risk involves market price volatility due to commodity price fluctuations, affected by politics, seasonal changes, technology, and market conditions.
• Currency or foreign exchange risk arises from volatile currency exchange rates, impacting global firms.
• Enterprise Risk Management (ERM) addresses all types of risks (strategic, operational, financial, reputational) for long-term value.
• Strategic risk involves uncertainty regarding an organization’s goals.
• Operational risks arise from business operations.
• Emerging risks are new, unpredictable risks that can significantly impact organizations.
• Terrorism includes bombs, cyber attacks, and CRBN (chemical, radioactive, biological, nuclear) attacks.
• Climate change and demographic factors have increased losses attributable to natural catastrophes.

Insurance Market Dynamics

• Underwriting cycle demonstrates a cyclical pattern in underwriting results and profitability.
• Consolidation combines business units into larger organizations.
• Loss forecasting predicts future losses through analysis of past losses.
• Probability Analysis forecasts future events like accidental and business losses.
• Regression Analysis forecasts, models time series, and finds cause-and-effect relationships between variables.

Financial Analysis in Risk Management Decision Making

• Fundamental analysis examines financial statements and economic indicators to find a security's intrinsic value.
• Technical analysis uses historical market data to predict future price movements.

Types of Insurers and Marketing System Overview in Financial Services

• Financing provides funds for business activities, purchases, or investing.

Major Types of Insurers

• Stock insurers are corporations owned by stockholders, raising capital through stock sales.
• Mutual insurers are owned by policyholders who can vote for the board of directors.

Changing Corporate Structure of Mutual Insurers

• Merger: Mutual insurers merge with other insurers to achieve economies of scale or diversify.
• Demutualization: Mutual insurers convert into stock insurers to raise capital and enhance growth potential.
• Lloyd’s of London provides a marketplace for members to write specialized insurance.
• Reciprocal insurance exchanges involve groups sharing risks among themselves.
• Blue Cross plans provide nonprofit hospital service coverage.
• Blue Shield plans offer nonprofit coverage for physicians’ fees and other medical services.
• Health Maintenance Organizations (HMOs) provide health insurance coverage for a monthly or annual fee.
• Captive insurers are owned by a parent firm to insure the parent firm's loss exposures.
• An agent legally represents the insurer and acts on the insurer's behalf.
• Marketing systems are methods for selling and marketing insurance products, also called distribution systems.

Major Types of Financial Institutions

• Depository institutions accept deposits and make loans (banks, credit unions, etc.).
• Contractual institutions include insurance companies and pension funds.
• Investment institutions manage investments (investment banks, underwriters, etc.).
• Direct response systems sell insurance directly to consumers without face-to-face meetings.
• Worksite marketing offers insurance to employees at their workplace.
• Stockbrokers sell life insurance and annuities in addition to investments.
• Financial planners advise on money management, planning, and asset protection, and may sell insurance.

Insurance Company Operations

• Rate making calculates premiums based on risk assessment, with actuaries playing a vital role.
• A rate is the cost per unit of insurance.
• An exposure unit is the measurement used in pricing.
• Underwriting evaluates applicants and their risk profiles to maintain profitability and equity.
• Production includes sales and marketing activities.
• Claim settlement investigates, verifies, and settles claims fairly and promptly.

Claim Settlement

• Claim settlement is the process by which an insurance company pays a policyholder for a covered loss.

Major Types of Adjusters

• Agents can settle small first-party claims.
• Company adjusters are salaried employees representing one company.
• Independent adjusters are self-employed contractors for multiple insurers.
• Public adjusters work for policyholders to help with unfair settlements.
• Investment generates income and ensures long-term financial stability.
• Reinsurance transfers potential losses from the primary insurer to another insurer (reinsurer).

Types of Reinsurance

• Facultative reinsurance is optional and used case-by-case for risks above retention limits.
• Treaty reinsurance involves an agreement between the primary insurer and reinsurer.

Methods for Sharing Losses

• Pro rata shares losses and premiums based on an agreed proportion.
• Excess-of-loss involves the reinsurer paying only when losses exceed a certain level.
• Investment involves acquiring assets to generate income or gain appreciation, requiring an outlay of resources.
• Life insurance investments combine insurance and investments.
• Property and Casualty insurance investments cover property damage and liability risks.

Financial Operations of Insurers

• A balance sheet summarizes assets, liabilities, and owners’ equity.
• Assets are what the insurer owns to meet obligations.
• Liabilities represent the insurer’s financial obligations.
• Loss reserves estimate the cost of settling claims for losses that have occurred but not been paid.
• Case reserves are loss reserves established for individual claims.
• Judgement Method establishes a claim reserve for each individual claim.
• Average Value Method assigns an average value to each claim, used when many claims are small.
• Tabular Value Method determines claim amounts based on life expectancy and disability duration.
• Policyholders’ surplus is the difference between an insurance company’s assets and liabilities.
• The income and expense statement summarizes revenues and expenses over a period.
• Earned premiums are portions of premiums for which insurance protection has been provided.
• Investment income is earnings generated from insurer investments.

Rate Making Methods

• Judgment Rating individually evaluates each exposure, with rates determined by the underwriter's judgment.
• Class Rating groups exposures with similar characteristics and charges the same rate, common in personal lines.
• R.A. 10607 is the “Insurance Code” of the Philippines.