FIE461 Risk and Insurance
In this course, we introduce students to the concept of risk, insurance as a risk management tool for individuals and businesses, and insurance as an industry. The course will consist of three main parts. The first part will focus on understanding and measuring risk, and will describe insurance, its different forms and parties involved (consumers, firms, insurers, and policymakers). The second part will focus on the demand side. This part will address risk management in insurance decisions as represented in rational models and contrast ideal and real worlds of insurance. We discuss puzzles in insurance and consider several biases and concepts from behavioral economics to increase our understanding of consumer behavior. The last part will focus on the supply side. This part will provide an overview of insurance companies’ risk management in order to create value as financial institutions. We focus on today’s challenges in rapidly changing insurance markets. Throughout the course we will talk about real-world examples, cases from businesses and policy implications.
A non-exhaustive list of topics includes:
- Expected utility models of insurance and prevention
- Anomalies on the demand side (insured) and the supply side (insurer)
- Methods and instruments that help to deal with insurance-related anomalies
- Low-probability high consequence (LPHC) events such as natural disasters and climate change.
- Moral hazard and adverse selection
- Incomplete information and asymmetric information
- Valuation, reinsurance, insurance linked securities (ILS)
- Guest lectures from the insurance sector
The course should be of interest to students who wish to understand risk better and deepen their knowledge of risk management tools with an emphasis on insurance. Insurance is highly relevant for all individuals in a society, because we all deal with decisions on "what" and "how much" to insure and we want to know that we make the right decisions. That is why, this course would be an asset not only to those who wish to pursue a career in insurance sector, but also those with an interest in applications of behavioral insights to insurance-related decisions of the insured, the insurer and the policymaker.
Upon completion of the course the students
- obtain a thorough knowledge of essential concepts in insurance economics
- understand both the demand and the supply side of an insurance problem
- have knowledge of how and why stylized facts about insurance differ from what rational models predict
- can apply this knowledge to new challenges in insurance markets such as climate change
- are able to identify different types of risks borne by each party involved in an insurance problem
- are able to select the appropriate risk management tools for each party such as self-insurance, self-protection, risk transfer and risk sharing
- are able to understand the limits of and deal critically with rational models of insurance
- are able to apply behavioral insights to propose interventions aiming at improving insurance decisions
- are able to explain what makes insurance firms different than other financial institutions
- can communicate the knowledge to insurance professionals and explain the insights to a wider audience
- can apply his/her knowledge and skills to deal with applied real-world insurance problems
- can identify relevant ethical dilemmas that insurance firms face
Credit reduction due to overlap
- Individual term paper (counts 50 % of the final grade)
- Presentation of the term paper (counts 30 % of the final grade)
- Midterm exam (counts 20 % of the final grade)
Midterm exam will be a home exam consisting of a set of question/problems to be answered/solved (approximately week 39-40).
For the final assessment, the students should write a proposal for an intervention or insurance scheme. They should present their ideas in the last weeks of lectures (approximately week 44-45) and thereafter hand in the proposal within the allowed time frame (approximately in week 49).
All elements have to be written/presented in English.
All elements have to be taken in the same semester.
A - F
- ECTS Credits
- Teaching language
Autumn. Will be offered Autumn 2023.
Assistant Professor Aysil Emirmahmutoglu, Department of Business and Management Science