Risk Management and Insurance

by Harrington, Scott

• ISBN13: 9780072339703
• ISBN10: 0072339705
• Edition: 2nd
• Format: Hardcover
• Copyright: 2003-07-15
• Publisher: McGraw-Hill/Irwin

Summary

For many years, introductory insurance textbooks presented insurance as a subject based in contracts. Slowly, the course has moved toward a consumer orientation, providing students with a broad, descriptive survey of the insurance field, covering topics such as legal aspects, life and health, and property and liability. Over the past 10 years, textbooks began to promote, and to a limited degree, incorporate a stronger business risk management component while maintaining a consumer orientation. Harrington/Niehaus' Risk Management and Insurance 2e is written to take the next step offering the essential aspects of insurance contracts and the insurance industry while providing a substantially more conceptual analysis and attention to business risk management and public policy issues that exists in current texts.

Author Biography

Greg Niehaus is Professor of Insurance and Finance in the Moore School of Business at the University of South Carolina.

Table of Contents

About the Authors	viii
Preface	ix
Chapter 1 Risk and Its Management	1	(14)
1.1 Risk	1	(3)
Different Meanings of Risk	1	(1)
Risk Is Costly	2	(1)
Direct versus Indirect Expected Losses	3	(1)
1.2 Types of Risk Facing Businesses and Individuals	4	(4)
Business Risk	4	(1)
Personal Risk	5	(1)
Comparison of Pure Risk and Its Management with Other Types of Risk	6	(2)
1.3 Risk Management	8	(4)
The Risk Management Process	8	(1)
Risk Management Methods	9	(3)
1.4 Business Risk Management Organization	12	(1)
1.5 Summary	13	(2)
Chapter 2 Objective of Risk Management	15	(15)
2.1 The Need for a Risk Management Objective	15	(1)
2.2 Understanding the Cost of Risk	16	(5)
Components of the Cost of Risk	17	(2)
Cost Tradeoffs	19	(1)
Cost of Other Types of Risk	20	(1)
2.3 Firm Value Maximization and the Cost of Risk	21	(4)
Determinants of Value	21	(1)
Maximizing Value by Minimizing the Cost of Risk	21	(1)
Measuring the Cost of Risk	22	(1)
Subsidiary Goals	23	(1)
Objectives for Nonprofit Firms	23	(2)
2.4 Individual Risk Management and the Cost of Risk	25	(1)
2.5 Risk Management and Societal Welfare	25	(2)
2.6 Summary	27	(3)
Chapter 3 Risk Identification and Measurement	30	(24)
3.1 Risk Identification	30	(4)
Identifying Business Risk Exposures	33	(1)
Identifying Individual Exposures	33	(1)
3.2 Basic Concepts from Probability and Statistics	34	(14)
Random Variables and Probability Distributions	34	(4)
Characteristics of Probability Distributions	38	(10)
3.3 Evaluating the Frequency and Severity of Losses	48	(2)
Frequency	48	(1)
Severity	49	(1)
Expected Loss and Standard Deviation	49	(1)
3.4 Summary	50	(4)
Chapter 4 Pooling Arrangements and Diversification of Risk	54	(21)
4.1 Risk Reduction through Pooling Independent Losses	54	(6)
Two Person Pooling Arrangement	54	(3)
Pooling Arrangement with Many People or Businesses	57	(3)
4.2 Pooling Arrangements with Correlated Losses	60	(3)
4.3 Insurers as Managers of Risk Pooling Arrangements	63	(2)
Types of Contracting Costs	64	(1)
Ex Ante Premium Payments versus Ex Post Assessments	65	(1)
4.4 Other Examples of Diversification: Stock Markets	65	(2)
4.5 Summary	67	(3)
Appendix 4A More on Risk Measurement and Risk Reduction	70	(5)
Chapter 5 Insurer Ownership, Financial, and Operational Structure	75	(22)
5.1 Insurer Capital	75	(1)
5.2 Ownership and Sources of Capital	76	(6)
Mutual Insurers	76	(1)
Stock Insurers	77	(1)
Lloyd's of London	78	(3)
Convergence of Financial Service Providers	81	(1)
5.3 Factors Affecting Insurer Capital Decisions	82	(7)
Benefits of Increasing Capital	82	(2)
Costs of Increasing Capital	84	(3)
Summary and Relationship to Business Risk Management	87	(1)
Amount of Capital Held by Insurers	87	(2)
5.4 Insurer Operations, Reinsurance, and Insolvency Risk	89	(6)
Diversification of Underwriting Risk	89	(1)
Reinsurance	89	(3)
Asset Choice and Investment Risk	92	(3)
5.5 Summary	95	(2)
Chapter 6 Insurance Regulation	97	(18)
6.1 Scope and Operation of State Insurance Regulation	97	(3)
Regulated Activities	98	(2)
National Association of Insurance Commissioners	100	(1)
6.2 History and Efficacy of State Regulation	100	(6)
History of State Regulation	101	(3)
State versus Federal Regulation	104	(2)
6.3 Objectives of Regulation: The Public Interest View	106	(4)
Serving the Public Interest by Mitigating Market Imperfections	106	(1)
An Example of the Public Interest View: Dealing with Costly and Imperfect Information	107	(3)
6.4 Regulation and Political Pressure	110	(2)
Regulators as Agents of the Public	110	(1)
The Economic Theory of Regulation	111	(1)
6.5 Summary	112	(3)
Chapter 7 Insolvencies, Solvency Ratings, and Solvency Regulation	115	(19)
7.1 Insurer Insolvencies	115	(4)
Frequency and Severity of Insurance Company Insolvencies	116	(1)
Causes of Insolvencies	116	(3)
7.2 Solvency Ratings	119	(3)
7.3 Overview of Solvency Regulation	122	(8)
Objectives of Solvency Regulation	122	(1)
Regulatory Monitoring of Insurer Insolvency Risk	123	(2)
Restrictions on Insurers' Capital and Assets	125	(1)
State Guaranty Systems	126	(4)
7.4 Summary	130	(2)
Appendix 7A Illustration of Risk-Based Capital	132	(2)
Chapter 8 Insurance Pricing	134	(28)
8.1 Insurance Costs and Fair Premiums	134	(1)
8.2 Expected Claim Costs	135	(7)
Homogeneous Buyers	135	(1)
Heterogeneous Buyers	136	(1)
Competition, Risk Classification, and Societal Welfare	137	(4)
Risk Classification Practices	141	(1)
8.3 Investment Income and the Timing of Claim Payments	142	(3)
All Claims Paid at the End of One Year	143	(1)
All Claims Paid at the End of Two Years	144	(1)
8.4 Administrative Costs	145	(1)
8.5 Profit Loading	146	(2)
8.6 Capital Shocks and Underwriting Cycles	148	(4)
Fair Premiums Are Forward Looking	149	(1)
Large Losses and Capital Shocks	149	(2)
The Underwriting Cycle	151	(1)
8.7 Price Regulation	152	(5)
Regulation of Rate Changes	153	(1)
Regulation of Rating Factors	154	(3)
Ensuring Availability When Regulation Depresses Rates	157	(1)
8.8 Summary	157	(5)
Chapter 9 Risk Aversion and Risk Management by Individuals and Corporations	162	(17)
9.1 Risk Aversion and Demand for Insurance by Individuals	162	(6)
The Effects of Insurance on Wealth	162	(2)
Risk Aversion	164	(1)
Other Factors Affecting an Individual's Demand for Insurance	165	(3)
9.2 Business Risk Management and Demand for Insurance	168	(5)
Shareholder Diversification	168	(2)
Closely Held Businesses	170	(1)
Why Purchase Insurance When Shareholders Are Diversified?	171	(2)
9.3 Summary	173	(3)
Appendix 9A Expected Utility	176	(3)
Chapter 10 Insurability of Risk, Contractual Provisions, and Legal Doctrines	179	(22)
10.1 Factors that Limit the Insurability of Risk	179	(9)
Premium Loadings	180	(3)
Moral Hazard	183	(3)
Adverse Selection	186	(2)
10.2 Contractual Provisions that Limit Coverage	188	(6)
Deductibles	188	(2)
Coinsurance	190	(1)
Policy Limits	190	(1)
Coordination of Benefits (Pro Rata and Excess Coverage Clauses)	191	(1)
Exclusions	191	(1)
Indemnity versus Valued Contracts	191	(1)
Insurance-to-Value (Coinsurance) in Property Insurance	192	(2)
10.3 Legal Doctrines	194	(3)
Reducing Contracting Costs through Fundamental Legal Doctrines	194	(2)
Resolving Coverage Disputes	196	(1)
10.4 Summary	197	(4)
Chapter 11 Loss Control	201	(14)
11.1 Types of Loss Control	201	(3)
Loss Prevention	202	(1)
Loss Reduction	202	(1)
Diversification and Expected Indirect Losses	203	(1)
Effects of Insurance on Loss Control	204	(1)
11.2 Optimal Loss Control When Costs and Benefits Are Known	204	(3)
A Simple Example of Safety Expenditures	204	(2)
Incorporating the Timing of Benefits and Costs	206	(1)
11.3 Examples of Identification of Benefits and Costs	207	(2)
Installation of Automatic Sprinkler System	207	(1)
Installation of Safety Guards	207	(1)
Child-Resistant Packaging of Nonprescription Drugs	208	(1)
Qualitative versus Quantitative Decision Making	209	(1)
11.4 Government Safety Programs	209	(1)
11.5 Valuing Loss of Life and Cost-Benefit
Analysis of Safety Regulation	210	(3)
11.6 Summary	213	(2)
Chapter 12 Legal Liability for Injuries	215	(27)
12.1 Some Background on the Law	215	(1)
12.2 Overview of Tort Liability Rules and Procedures	216	(5)
Basic Tort Liability Rules	217	(1)
Damages	218	(1)
Joint and Several Liability	219	(2)
12.3 Liability from Negligence	221	(2)
Elements of Negligence	221	(1)
Defenses to Negligence	222	(1)
12.4 Economic Objectives of the Tort Liability System	223	(5)
Optimal Safety (Optimal Loss Control)	224	(2)
Optimal Compensation to Victims	226	(2)
12.5 Limited Wealth and Limited Liability	228	(2)
Situations in Which Injurers Can Escape Liability	228	(1)
Compulsory Liability Insurance and the Judgment Proof Problem	229	(1)
12.6 Tort Liability and Safety Regulation	230	(1)
12.7 Proposals for Tort Reform	231	(2)
Modifying Incentives to Bring Suits	231	(1)
Reducing Damages	232	(1)
Limiting the Application of Joint and Several Liability	233	(1)
12.8 Summary	233	(3)
Appendix 12A Why Have a Tort System? A Closer Look	236	(6)
Chapter 13 Automobile Insurance	242	(34)
13.1 Overview of Auto Loss Exposures and Insurance	242	(8)
Liability Coverage	244	(2)
Medical Payments Coverage	246	(1)
Uninsured and Underinsured Motorists Coverage	246	(2)
Damage and Other Losses to Autos	248	(2)
13.2 Auto Insurance Pricing and Underwriting	250	(11)
Rating Factors	251	(4)
Underwriting	255	(3)
Residual Markets	258	(3)
13.3 Should Auto Insurance Be Compulsory?	261	(4)
Economic Rationale	261	(1)
Criticisms and Limitations of Compulsory Insurance	262	(2)
Alternatives to Compulsory Insurance	264	(1)
13.4 Should Tort Liability Be Limited with No-fault Laws?	265	(7)
No-fault Compared to Tort Liability	265	(1)
PIP Benefits and Limitations on Tort Liability with Compulsory No-fault	266	(1)
The Rationales for and against No-fault	267	(2)
How Does No fault Affect Premiums?	269	(2)
Choice No-fault	271	(1)
Other Proposals to Limit Tort Liability	272	(1)
13.5 Summary	272	(4)
Chapter 14 Homeowners Insurance	276	(21)
14.1 Homeowners Insurance	276	(9)
Types of Policies	276	(1)
Description of Major Coverages	277	(4)
Property Loss Settlement	281	(3)
Pricing Homeowners Policies	284	(1)
14.2 Personal Umbrella Policies	285	(1)
14.3 Coverage of High Risk/Catastrophic Perils	286	(3)
Earthquake Coverage	286	(1)
National Flood Insurance	286	(1)
Residual Market Plans	287	(2)
14.4 Impact of Catastrophes on Property Insurance	289	(5)
Florida and Hurricane Andrew	290	(2)
California and the Northridge Earthquake	292	(1)
Rationale for Government-sponsored Reinsurance Arrangements	292	(1)
New Capital Market Instruments for Financing Catastrophe Losses	293	(1)
14.5 Summary	294	(3)
Chapter 15 Life Insurance and Annuities	297	(37)
15.1 Life Insurance Product Overview	297	(3)
15.2 Traditional Products: Term, Endowment, and Whole Life	300	(5)
Term Insurance	300	(1)
Endowment Insurance	300	(1)
Whole Life Insurance	301	(4)
15.3 Product Innovation: Universal and Variable Life	305	(5)
Universal Life	305	(4)
Variable Life	309	(1)
15.4 Tax Benefits from Life Insurance Policies	310	(1)
15.5 Annuity Contracts	311	(3)
Uses of Annuities	312	(1)
Specific Savings Features	312	(2)
15.6 Life Insurance Pricing	314	(9)
One-year Term Insurance	314	(3)
Two-year Term Insurance	317	(2)
Comparison	319	(1)
Pricing Immediate Annuities	320	(1)
Pricing Whole Life Insurance	321	(2)
15.7 How Much Life Insurance Coverage Should Be Purchased?	323	(2)
15.8 Life Insurance Cost Comparisons	325	(3)
Background	325	(1)
Term Insurance	325	(1)
Whole Life Insurance	326	(1)
Universal Life Insurance and Other Investment Sensitive Products	327	(1)
15.9 Summary	328	(3)
Appendix 15A Retrospective Analysis of Cash Value Accumulation	331	(3)
Chapter 16 Employee Benefits: Overview and Group Medical Coverage	334	(30)
16.1 Major Types of Employee Benefits	334	(3)
Who Pays the Cost of Benefits?	336	(1)
Flexibility in Choice of Benefits	336	(1)
16.2 Why Firms Provide Employee Benefits	337	(2)
Income Tax Advantages of Employee Benefits	337	(1)
Cost Savings with Group Insurance	338	(1)
Productivity and Employee Benefits	339	(1)
Regulatory Restrictions on Employee Benefits	339	(1)
16.3 Overview of Group Medical Expense Coverage	339	(10)
Traditional Fee-for-Service Insurance Arrangements	339	(3)
Fee-for-Service and Utilization of Health Care Services	342	(3)
Reducing Moral Hazard under Fee for-Service Arrangements	345	(1)
Health Maintenance Organizations	346	(3)
16.4 Group Medical Plan Provisions and Pricing Issues	349	(3)
Dependent Coverage	349	(1)
Cross-Subsidies in Group Medical Coverage	349	(1)
Mandated Benefits	350	(1)
Portability of Coverage	350	(1)
Renewability of Small Group Health Insurance	351	(1)
16.5 Health Care Cost Inflation and the Uninsured Problem	352	(4)
Why Does Health Care Cost So Much?	354	(1)
The Uninsured: Who, Why, and Effects on Others	355	(1)
16.6 Health Care Reform	356	(4)
Trade-offs Involving Cost, Quality, and the Scope of Insurance	356	(2)
Possible Approaches to Reform	358	(2)
16.7 Summary	360	(4)
Chapter 17 Retirement Plans	364	(24)
17.1 Overview of Retirement Plans	364	(4)
Defined Benefit Plans	365	(1)
Defined Contribution Plans	366	(1)
Cash Balance Plans	367	(1)
17.2 Tax Advantages of Retirement Plans	368	(4)
Saving Outside of a Qualified Retirement Plan	368	(1)
Effect of Deferral of Tax on Investment Earnings	369	(1)
Effect of Deferring Tax on Both Investment Earnings and Contributions	369	(2)
Lower Tax Rates during Retirement	371	(1)
Tax Advantages of Defined Benefit Plans	372	(1)
17.3 Incentive Effects of Employer-sponsored Pension Plans	372	(4)
Increasing Productivity	373	(2)
Inducing Retirement	375	(1)
17.4 Types of Defined Contribution Plans	376	(2)
Money Purchase and Profit Sharing Plans	376	(1)
401(k) Plans	376	(1)
Employee Stock Ownership Plans	377	(1)
Simplified Employee Pensions (SEP) and SIMPLE Plans	378	(1)
Growth in Defined Contribution Plans	378	(1)
17.5 Self-employed (Keogh) and Individual Retirement Accounts (IRAs)	378	(2)
Keogh Plans	378	(1)
Individual Retirement Plans (IRAs)	379	(1)
17.6 Retirement Plan Provisions and Regulations	380	(4)
Nondiscrimination and Vesting Rules	380	(1)
Funding Requirements	380	(1)
Pension Insurance	381	(2)
Excess Assets in Defined Benefit Plans	383	(1)
17.7 Summary	384	(4)
Chapter 18 Workers' Compensation and Employee Injuries	388	(26)
18.1 Overview of Workers' Compensation Laws	388	(3)
18.2 Workers' Compensation Benefits	391	(4)
Medical Benefits	391	(1)
Disability Benefits	392	(2)
Survivor Benefits	394	(1)
18.3 Why Have Workers' Compensation?	395	(4)
Who Pays for Injury Costs?	395	(1)
Benefits and Costs of Different Arrangements	396	(3)
18.4 Workers' Compensation Insurance and Self-insurance	399	(5)
Description of Insurance Coverage	399	(1)
Insurance Pricing, Residual Markets, and State Funds	400	(3)
Self-insurance and Large Deductible Policies	403	(1)
Second Injury Funds	404	(1)
18.5 Problems and Reforms in Workers' Compensation	404	(4)
18.6 Government Safety Regulation and Other Sources of Liability	408	(1)
The Occupational Safety and Health Act	408	(1)
Americans with Disabilities Act	408	(1)
Other Sources of Liability	409	(1)
18.7 Summary	409	(5)
Chapter 19 Social Security	414	(27)
19.1 Overview of Social Security 414
19.2 Old-Age, Survivors, and Disability Insurance (OASDI) Benefits	415	(6)
Eligibility	415	(1)
Types of OASDI Benefits	415	(3)
OASDI Benefit Amounts	418	(3)
19.3 OASDI Financing	421	(4)
OASDI and HI Payroll Tax	421	(1)
Pay-as-you-go Financing	422	(1)
Projected OASDI Deficits	423	(2)
19.4 Understanding Pay-as-you-go Systems	425	(4)
Economic and Demographic Factors Affecting Benefits and Taxes	425	(1)
Historical and Projected Implicit Rates of Return with Pay-as-you-go Financing	425	(4)
19.5 Why Have Social Security?	429	(3)
Self-financing COLAs	430	(1)
Compulsion and Social Adequacy	431	(1)
Effect on Savings, Capital Formation, and Economic Growth	432	(1)
19.6 Proposed Changes and Alternatives to Social Security	432	(2)
Changes That Would Maintain the Basic Structure of OASDI	433	(1)
Changes That Would Modify the Basic Structure of OASDI	433	(1)
19.7 Medicare	434	(2)
Medicare Benefits	434	(1)
Medicare Financing	435	(1)
Private Coverage to Supplement Medicare	436	(1)
19.8 Summary	436	(3)
Appendix 19A Implicit Rate of Return on Payroll Taxes with Pay-as-you go Financing	439	(2)
Chapter 20 Risk Management and Shareholder Wealth	441	(22)
20.1 Principles of Business Valuation	441	(4)
Valuation Formula	441	(2)
Components of the Opportunity Cost of Capital	443	(1)
Compensation for Risk	443	(2)
20.2 Risk Management and the Opportunity Cost of Capital	445	(1)
20.3 Risk Management and Expected Cash Flows	446	(10)
Insurance Premium Loadings	448	(2)
Services Provided by Insurers	450	(1)
Insurance and the Likelihood of Having to Raise Costly External Funds	450	(2)
Insurance and Financial Distress	452	(4)
20.4 Summary	456	(2)
Appendix 20A Issuing Securities versus Purchasing Insurance	458	(2)
Appendix 20B How Insurance Can Mitigate the Underinvestment Problem	460	(3)
Chapter 21 Tax, Regulatory, and Accounting Factors Affecting Corporate Risk Management	463	(21)
21.1 Tax Benefits Defined	463	(2)
21.2 Progressivity in Corporate Income Tax Rates	465	(3)
Overview	465	(1)
Numerical Example and Additional Insights	466	(1)
Progressivity of US Corporate Income Tax Rates	467	(1)
21.3 Tax Treatment of Insurers versus Noninsurance Companies	468	(3)
Overview	468	(1)
Example and Additional Insights	468	(2)
Tax Benefit with Overstated Loss Reserves	470	(1)
21.4 Insuring Depreciated Property	471	(3)
Overview	471	(1)
Example and Additional Insights	471	(3)
21.5 Insurance and Interest Tax Shields on Debt	474	(1)
21.6 Insurance Premiums and Excise Taxes	475	(1)
21.7 Regulatory Effects on Loss Financing	475	(2)
Compulsory Insurance	476	(1)
Restriction on the Choice of Insurers	476	(1)
21.8 Financial Accounting Influences on Loss Financing	477	(3)
Financial Accounting for Insurance Premiums and Uninsured Losses	478	(1)
Impact of Financial Accounting Numbers on Cash Flow	479	(1)
21.9 Summary	480	(3)
Appendix 21A Tax Benefits when Insurers Overstate Loss Reserves	483	(1)
Chapter 22 Risk Retention/Reduction Decisions	484	(16)
22.1 Firm Characteristics Affecting Risk Retention (Reduction) Decisions	484	(5)
Benefits of Increased Retention	485	(2)
Costs of Increased Retention	487	(2)
A Basic Guideline for Optimal Retention	489	(1)
22.2 Evidence on Business Risk Reduction Decisions	489	(3)
22.3 Aggregated or Disaggregated Risk Management?	492	(6)
Linking Theory with Practice	492	(1)
Advantages and Disadvantages of Disaggregation	493	(5)
22.4 Summary	498	(2)
Chapter 23 Commercial Insurance Contracts	500	(26)
23.1 Overview of Contracts and Markets	500	(5)
Major Types of Commercial Property-Casualty Insurance	501	(3)
Designing and Negotiating Commercial Insurance Programs	504	(1)
23.2 Deductibles and Self-insured Retentions	505	(2)
23.3 Policy Limits and Primary/Excess/Umbrella Policies	507	(4)
23.4 Property Insurance	511	(3)
Covered Losses	512	(1)
Covered Causes of Loss	513	(1)
23.5 Commercial General Liability Insurance	514	(8)
CGL Covered Losses	514	(1)
CGL Exclusions	515	(1)
Occurrence Coverage	516	(3)
Claims-Made Coverage	519	(3)
23.6 Pricing and Underwriting: Commercial versus Personal Coverage	522	(1)
23.7 Summary	523	(3)
Chapter 24 Hedging with Derivative Contracts	526	(24)
24.1 Introduction to Derivatives and Hedging	526	(7)
Exposure Diagrams Revisited	527	(1)
Hedging with Call Option Contracts	528	(3)
Hedging with Put Options	531	(1)
Cash Settlement versus Physical Delivery	531	(1)
Basis Risk	532	(1)
24.2 Option Pricing	533	(3)
Influence of Underlying Asset, Contract, and Market Characteristics	534	(2)
24.3 Hedging with Forward/Futures Contracts	536	(3)
Illustration	536	(2)
Forward Prices	538	(1)
24.4 Other Derivative Contracts	539	(2)
Constructing Other Derivatives	539	(1)
Swap Contracts	540	(1)
24.5 Comparison of Derivative and Insurance Contracts	541	(3)
Market Prices versus Specific Losses	542	(1)
Basis Risk and Extent of Risk Reduction	542	(1)
Contracting Costs	542	(1)
Liquidity	543	(1)
Summary	544	(1)
24.6 Markets for Derivatives	544	(3)
Over-the-counter versus Exchange-traded Derivatives	544	(2)
Common Risks That Are Hedged with Derivatives	546	(1)
24.7 Summary	547	(3)
Chapter 25 Alternative Risk Transfer	550	(20)
25.1 Description of Alternative Risk Transfer (ART)	550	(1)
25.2 Loss Sensitive Contracts	551	(4)
Experience-rated Policies	551	(1)
Large Deductible Policies and Retrospectively Rated Policies	551	(2)
Related Loss Sensitive Plans	553	(1)
Loss Portfolio Transfers	554	(1)
25.3 Finite Risk Contracts	555	(2)
25.4 Captive Insurers	557	(5)
Motivations for Forming Captive Insurers	559	(1)
The Tax Treatment of Captive Transactions	560	(2)
Risk Retention Groups	562	(1)
25.5 Multiline/Multitrigger Insurance Policies	562	(1)
25.6 Contingent Financing Arrangements	563	(2)
Contingent Debt	563	(1)
Contingent Equity	564	(1)
Advantages and Disadvantages	564	(1)
Lines of Credit	564	(1)
25.7 Structured Debt Instruments	565	(1)
Price or Index-Linked Debt	566	(1)
Catastrophe Bonds	566	(1)
25.8 Trends in Loss Financing	566	(1)
25.9 Summary	567	(3)
Chapter 26 Analysis Tools Used in Corporate Risk Management	570	(21)
26.1 Risk Management Tools	570	(1)
26.2 Calculating Frequency and Severity of Losses from Historical Data	571	(4)
26.3 Using Entire Probability Distributions	575	(7)
Approximating Loss Distributions with the Normal Distribution	575	(1)
Computer Simulation of Loss Distributions	576	(6)
26.4 Correlation Analysis	582	(3)
26.5 Use of Discounted Cash Flow Analysis	585	(3)
The Net Present Value Criterion	585	(1)
Calculating Incremental Expected Cash Flows	585	(1)
Example: Forming a Captive Insurer	586	(2)
The Appropriate Cost of Capital	588	(1)
26.6 Summary	588	(3)
Chapter 27 Enterprise Risk Management: A Case Study	591	(14)
27.1 Enterprise Risk Management	591	(1)
27.2 Enterprise Risk Management at United Grain Growers	592	(11)
Background on UGG	592	(3)
UGG's Analysis	595	(5)
Choices Faced by UGG's Managers	600	(3)
27.3 Summary	603	(2)
Chapter 28 Corporate Liability to Customers, Third Parties, and Shareholders	605	(20)
28.1 Products Liability	605	(8)
Legal Background	605	(3)
Insurance Coverage	608	(1)
Issues	609	(4)
28.2 Environmental Liability	613	(5)
Legal Background	613	(2)
Insurance Coverage	615	(2)
Issues	617	(1)
28.3 Directors and Officers' Liability	618	(4)
Legal Background	618	(2)
Indemnification and Insurance Coverage	620	(1)
Issues	621	(1)
28.4 Summary	622	(3)
Chapter 29 Issues in Liability Risk and Its Management	625	(21)
29.1 Risk Shifting through Limited Liability	625	(7)
Limited Liability as Insurance against Loss	626	(2)
The Moral Hazard Problem	628	(1)
Why Have Limited Liability?	629	(2)
Exceptions to Limited Liability	631	(1)
29.2 Liability for Actions of Employees and Other Parties	632	(2)
Vicarious Liability Doctrine	632	(1)
Liability of Businesses for Actions of Independent Contractors	632	(2)
29.3 Hold Harmless and Indemnity Agreements	634	(3)
Effect on the Cost of Risk	634	(2)
The Role of Insurance	636	(1)
Summary of Incentive Effects	637	(1)
29.4 Claims Management and Administration	637	(5)
General Claims Strategy	637	(3)
Monitoring Performance of Insurers and Outside Contractors	640	(2)
Claim Cost Allocation	642	(1)
29.5 Summary	642	(4)
Index	646