New Understanding of Risk Management

The New Understanding of Risk Management

Before I take RMI 300 this semester, my understanding of risk management was quite vogue. I am a transfer student from China. In China, the impression of insurance industry is bad. Chinese industry insurance is not developed and the development time is very short, people’s understanding of insurance is not sufficient. For example, I thought as long as I bought insurance, the insurance will cover any loss that I may have. However, the truth is different kinds of insurance cover different kinds of loss. Gaining insight into risk management is the reason of taking RMI 300.

Loss, the core word of risk management, can be influenced by hazard. As for me, hazard is a total new conception. There are four kinds of hazard: moral hazard, morale hazard, physical hazard and legal hazard. Because of my language problem, I almost cannot differentiate moral and morale hazard. Both moral and morale hazard increase the frequency and severity of loss, but moral hazard is the result of people’s dishonesty and morale hazard is from people’s carelessness and indifferent behavior. (Nyce, 2006, p.1.8) Here is the example of moral hazard in our daily life: If you buy insurance for your bike, you will tend to have less incentive to protect against theft, because even if your bike is stolen, you will not totally lose out. If your bike is uninsured, it has 10% chance of being stolen. Therefore, if the bike worth 1000$, the cost of insurance will be around 100$. However, once your bike is insured, the bike may have 30% chance of getting stolen. The insurance does not want to insure bicycles because people change their behavior and insurance company may lose money. From this example, we can see that the moral hazard can cause loss. Even though you can get compensation if your bike is stolen because you buy the insurance of it, you still get some losses. Additionally, the insurance company may assume you will look after the bike, and you think you are but you are not. It is dishonesty, not carelessness or indifference. The moral hazard also happens in the financial market. When Greece joined Euro, it benefited from low interest. This encourages Greece to borrow, but they already have high debts. The reason that Greece keeps borrowing is other European countries which also join into Euro will bail it out when Greece get into difficulties. (Pettinger. 2013.)

Another interesting thing I learnt from the class is the difference between tradition risk management and enterprise risk management. I thought every department in the company has its own risk management, which is tradition risk management,