The Binomial Bookstore

RISK MANAGEMENT AND INSURANCE
by Scott E. Harrington and Gregory R. Niehaus

"The types of risk, risk analysis tools, and methods used to manage risk are always
changing. To illustrate, consider the following brief sampling of events that occurred during
the 1990s:
Large catastrophe losses disrupt property insurance markets and lead to innovative
approaches to their financing.
Legal liability for environmental damage expands.
Rising costs of medical care lead to the widespread adoption of managed care systems
by employers and health insurers.
Corporations take a holistic approach to risk management.
Eighty percent of Fortune 1000 companies use Monte Carlo simulation software to
analyze and manage risk.
Hedging price risk using derivatives continues to grow at high rates.

"A course in risk management and insurance therefore requires that students be taught
a
framework for understanding the effects of risk, the tools and methods used to measure and
manage risk, and the process of making risk management decisions. We believe that this
new book accomplishes these tasks.

"Current risk management and insurance textbooks do an excellent job of describing the
varied and complex institutional and contractual details of the insurance industry. While
detailed institutional knowledge is important for those who currently work or plan to work in
the insurance industry, the vast majority of business students do not plan to enter the
insurance field. They are being trained to be general managers or specialists in other fields.
Business students therefore need a general framework for thinking about the effects of risk
and a broad knowledge of risk management and insurance. In addition, they need to be
aware of the many important public policy issues related to risk, including legal liability and
economic security issues. Students who seek careers in risk management and insurance
also need a strong conceptual foundation for understanding institutional details. Because
institutional details are constantly changing, it is very important for students to learn general
concepts that can be applied to new sets of problems, new types of risk, and new
institutional
structures. In addition, introductory courses in risk management and insurance should
stimulate critical thinking and promote the development of problem solving skills to better
prepare students for meaningful careers in an information-intensive global economy.

"This book has seven main parts:

"Part I (Overview of Risk Management) contains two chapters that introduce the types of
risk that are covered in the book, the risk management process, risk management methods,
and objectives of risk management. This material will likely be covered whether the book is
used for an introductory or a second level course.

"Part II (Risk Reduction through Insurance Markets) includes six chapters that provide
students with a foundation for understanding risk and insurance markets. Chapter 3 covers
tools for measuring risk and shows how and why risk is reduced through pooling
(diversification). Chapters 4 through 8 then discuss (1) risk pooling and insurance
institutions;
(2) insurer insolvency risk, solvency ratings, and regulation; (3) insurance pricing and price
regulation; (4) basic aspects of the demand for risk reduction by individuals and businesses;
and (5) factors that influence the insurability of risk, as well as insurance contract provisions
and legal doctrines that enhance the insurability of risk. Most or all of this material normally
will be covered in an introductory course, and it provides the foundation for discussion of
specific types of risk and insurance in later chapters. Depending on students' background,
several of these chapters also will likely be appropriate as a foundation for a second level
course on risk management.

"Part III (Fundamentals of Corporate Risk Management) contains five chapters with
detailed discussion of how risk management affects business value, why large firms hedge
risk and purchase insurance, loss financing methods, risk management decision making,
and how insurance compares with hedging risk via financial derivatives. This material
generally will be an integral part of a second level course on business risk management.

"Part IV (Legal Liability and Worker Injury Risk) begins with a chapter on the economics
of liability risk and the legal liability system. The other three chapters cover key business
liability risk exposures and insurance for these exposures, workers' compensation, and
issues in liability risk management. An introductory course commonly will cover much of this
material, with the possible exception of one or more parts of Chapter 15 that deal with
specific business liability risk exposures and coverage in Chapter 17 regarding issues in
liability risk management. A second level course on risk management will likely cover
Chapter 14 (the economics of liability risk and the legal liability system), Chapter 15 (specific
business liability exposures), and Chapter 17 (issues in liability risk management).
Depending on the treatment in a prior course, some instructors of second level courses on
risk management also may choose to cover some or all of the material in Chapter 16 on
worker injuries.

"Part V (Benefit Plans and Social Security) provides an overview of employee benefit
plans (Chapter 18), the issues related to group medical expense plans (Chapter 18),
retirement plans (Chapter 19), and Social Security (Chapter 20). We expect that many
instructors would include much of the material in these chapters.
Part VI (Personal Insurance) introduces personal insurance contracts and markets and
discusses key public policy issues concerning personal insurance. The three chapters in this
part deal with automobile insurance, homeowners insurance, and life insurance and
annuities, respectively. We expect that many instructors will choose to cover much of this
material in an introductory course.

"Part VII (Government Regulation of Insurance Markets) contains a concluding chapter
that summarizes key aspects of insurance regulation, including regulatory goals and the
possible effects of political pressure on regulatory behavior. This chapter supplements the
discussion of specific facets of regulation in earlier chapters, such as the discussion of
solvency regulation in Chapter 5, price regulation in Chapter 6, and regulatory issues
associated with particular types of insurance in a number of other chapters. Our discussion
of
regulation in these earlier chapters is based on our classroom experience, which suggests
that it is both helpful and more interesting to students to cover selected aspects of regulation
as issues arise."

ABOUT THE AUTHORS
"Scott E. Harrington is Professor of Insurance and Finance, and Francis M. Hipp
Distinguished Faculty Fellow, in the Darla Moore School of Business at the University of
South Carolina. He received his Ph.D. in Finance from the University of Illinois in 1979 and
was on the faculty of the Wharton School at the University of Pennsylvania during 1978-88.
Dr. Harrington has authored and edited many books and published numerous articles in
academic and professional journals including the Journal of Risk and Insurance, the Journal
of Business, the Journal of Banking and Finance, and the Review of Economics and
Statistics. He has consulted for many leading insurance organizations and is a former
President of both the American Risk and Insurance Association and the Risk Theory Society.
He was named the 1990 Insurance Educator of the Year by the Professional Insurance
Agents Foundation."

"Greg Niehaus is Associate Professor of Insurance and Finance in the Darla Moore
School of Business at the University of South Carolina. He received his Ph.D. in Economics
from Washington University in 1985. From 1985-90, he was on the finance faculty at the
University of Michigan and from 1996-97 he held the A. J. Pasant Chair of Life Insurance and
Financial Services at Michigan State University. He has published articles in the Journal of
Risk and Insurance, the Journal of Finance, the Journal of Financial Economics, the Journal
of Business, the Journal of Banking and Finance, Financial Management, The Accounting
Review, and the Journal of Insurance Regulation. In 1994, he received the Alfred G. Smith
Award for teaching excellence."

1998, 674 pages. Order #DR-375, $95.00

The Binomial Bookstore

Risk Management, Business Impact

Rothstein Associates Inc.