UNIT CODE :BAF2206

UNIT TITLE: PRINCIPLES OF RISK MANAGEMENT AND INSURANCE

CAT 1 & 2

Q1:

i) Briefly explain the steps in the Risk Management Process

Risk Identification: The first step is to identify the potential risks that could impact the
organization. This involves reviewing internal and external factors such as financial,
operational, and environmental risks.

Risk Assessment: Once the risks have been identified, the next step is to assess the
likelihood and impact of each risk. This helps prioritize which risks need to be addressed
first.

Risk Mitigation: This step involves developing and implementing risk mitigation strategies
to reduce the likelihood or impact of the risks. This can include transferring the risk to
another party, reducing the risk through control measures, or avoiding the risk altogether.

Risk Monitoring: After the mitigation strategies have been put in place, the risks must be
monitored to ensure that they are being effectively managed. This includes regularly
reviewing and updating the risk management plan as needed.

Risk Reporting: The final step involves reporting on the risk management process to key
stakeholders, such as senior management, board members, or regulatory bodies. This ensures
that all parties are aware of the risks and the steps being taken to manage them.

ii) What do you understand by the term captive insurance

Captive insurance is a form of self-insurance where a company or group of companies

establish their own insurance company to provide coverage for their own risks. The primary
purpose of a captive insurance company is to provide greater control over risk management,
cost savings, and the ability to tailor insurance coverage to meet specific needs.

The company or group of companies that own the captive insurance company can directly
finance their own risks, rather than paying premiums to a third-party insurer. This allows
them to retain more control over the management of their risks, while also allowing them to
reap the benefits of any underwriting profits that may arise.

iii) Outline the role of government in risk management

The Kenyan government plays a significant role in risk management through various
agencies and policies.

Policy and Regulation: The Kenyan government develops policies and regulations to guide
risk management practices in different sectors of the economy. For example, the Central

Bank of Kenya regulates the financial sector to ensure that financial institutions are managing
their risks effectively.

Disaster Management: The government is responsible for disaster management and

response, which involves identifying, assessing and managing risks associated with natural
disasters, such as floods, droughts and landslides. The National Disaster Management
Authority is responsible for coordinating and managing disaster response efforts.

Environmental Risk Management: The government is also responsible for managing

environmental risks, including air and water pollution, deforestation, and climate change. The
National Environment Management Authority is responsible for monitoring and enforcing
environmental regulations.

Health Risk Management: The Kenyan government is responsible for managing health
risks, including disease outbreaks, food safety, and workplace health and safety. The Ministry
of Health is responsible for setting policies and regulations related to health risk management.

Financial Risk Management: The government also plays a role in managing financial risks,
including market, credit and liquidity risks. The Central Bank of Kenya is responsible for
setting policies and regulations related to financial risk management.
Q2:

Explain the reasons for the slow uptake of insurance by Kenyans in general and suggest
ways on how this can be improved

There are several reasons why there has been a slow uptake of insurance by Kenyans in
general. These include:

Lack of Awareness: Many Kenyans are not aware of the benefits of insurance and how it can
help them manage risks in their daily lives.

Affordability: Insurance can be expensive, especially for low-income earners, making it

unaffordable for many Kenyans.

Lack of Trust: There is a general lack of trust in the insurance industry, with some Kenyans
viewing it as a scam or an unnecessary expense.

Complex Products: Insurance products can be complex, making it difficult for Kenyans to
understand what they are buying and the benefits they will receive.

Limited Distribution Channels: Insurance products are not always readily available to
Kenyans, especially those living in rural areas.

To improve the uptake of insurance in Kenya, the following strategies can be adopted:

Public Education: There is a need for a concerted effort to educate the public on the
importance of insurance. This can be done through public awareness campaigns, media
advertisements and outreach programs.

Affordable Insurance Products: Insurance companies should develop affordable products

that are accessible to a wider range of Kenyans. This can be achieved through the
development of micro-insurance products and the use of technology to reduce distribution
costs.

Transparency: Insurance companies should be transparent in their products and services,

making it easy for Kenyans to understand what they are buying and the benefits they will
receive.

Trust Building: The insurance industry should work towards building trust with the public
through transparent and ethical practices. Insurance companies should be held accountable
for delivering on their promises to customers.
Q3:

Conduct Risk Assessment: The first step in managing risks in the banking sector is to
conduct a risk assessment. This involves identifying and evaluating potential risks and their
potential impact on the organization. This can help banks to identify and prioritize risks, and
develop mitigation strategies.

Develop Cybersecurity Measures: Cybersecurity is a major risk in the banking sector, with
hackers targeting banks to steal sensitive information and funds. Banks should invest in
robust cybersecurity measures, such as firewalls, intrusion detection systems, and encryption,
to prevent cyber attacks.

Develop and Implement Risk Management Policies: Banks should develop and implement
risk management policies and procedures to manage risks. These policies should be regularly
reviewed and updated to reflect changes in the risk landscape.

Employee Training: Employees are a key part of a bank's risk management strategy. Banks
should provide regular training to employees on risk management, cybersecurity, and
compliance. This can help to reduce the risk of human error and ensure that employees are
aware of the bank's policies and procedures.

Regular Testing and Monitoring: Banks should regularly test and monitor their risk
management systems to ensure that they are effective in managing risks. This can involve
regular audits, penetration testing, and monitoring of suspicious activity.

Collaboration: Collaboration with other players in the industry, such as regulators and other
banks, can help banks to manage risks more effectively. Sharing information and best
practices can help to reduce the impact of risks and improve the overall risk management in
the banking sector.

Q4:

The article discusses the challenges faced by the insurance industry during the 2008 financial
crisis. Some insurance companies were heavily invested in risky assets and suffered
significant losses, leading to a decline in their financial strength and solvency. To protect
themselves from collapse, insurance companies can take several measures:
Diversify investments: Insurance companies should diversify their investment portfolios to
reduce the risk of losses in any one asset class. They can invest in a mix of stocks, bonds, and
other assets that provide a stable return.

Risk management: Insurance companies should have robust risk management policies and
procedures in place to identify and manage risks. They should regularly assess their risk
exposure and have contingency plans in place to manage risks that may arise.

Maintain adequate reserves: Insurance companies should maintain adequate reserves to

ensure that they can meet their obligations to policyholders. This requires a sound financial
management strategy

Strong capital position: Insurance companies need to maintain a strong capital position to
protect themselves from unexpected losses. This means having sufficient reserves and capital
to cover any losses that may arise, including those from catastrophic events. Insurance
companies are required by law to maintain a certain level of capital, which is typically
determined by regulators.

Effective underwriting: Insurance companies need to have effective underwriting practices

in place to ensure that they are only taking on risks that they can manage. This involves
evaluating potential customers based on factors such as their age, health, and previous claims
history. By taking on risks that are more likely to be profitable, insurance companies can
protect themselves from collapse.

Regulatory compliance: Insurance companies are subject to regulatory oversight to ensure

that they are operating in a safe and sound manner. Compliance with regulatory requirements
can help to protect insurance companies from collapse by ensuring that they are operating in
a prudent and responsible manner.

In summary, based on the article, insurance companies can protect themselves from collapse
by taking a proactive approach to risk management, diversifying their portfolios, maintaining
a strong capital position, and complying with regulatory requirements. By doing so, they can
mitigate the potential for unexpected losses and ensure that they are able to continue
operating in a sustainable manner over the long term.

Q5:
Out of 700 employees of a firm 340 have a life insurance policy, 280 have a medical
insurance cover and 150 participate in both programmes

P(A or B) = P(A) + P(B) - P(A and B)

i) The probability that a randomly selected employee will be a participant in at least one
of the two programmes;

P(at least one) = (340 + 280 - 150) / 700 = 470 / 700 = 0.67

Therefore, the probability that a randomly selected employee will be a participant in at least
one of the two programmes is 0.67.

ii) The probability that an employee will be a participant in the life insurance plan given
that he/she has a medical insurance coverage;

P(A given B) = P(A and B) / P(B)

where A is the event of having a life insurance policy, and B is the event of having a medical
insurance cover.

P(A and B) = 150/700 and P(B) = 280/700.

Therefore, the probability that an employee will have a life insurance policy given that he/she
has a medical insurance coverage is:

P(A given B) = (150/700) / (280/700) = 0.54

iii) The probability that an employee has none of the two insurance covers;

P(neither) = 1 - P(at least one) = 1 - 0.67 = 0.33

Therefore, the probability that an employee has none of the two insurance covers is 0.33.

Q 6:

a) The financial crisis of 2008 was fueled by globalization in several ways.

Firstly, the rapid growth of global trade and financial markets meant that economic problems
in one country could quickly spread to others.

Secondly, deregulation and liberalization of financial markets in many countries allowed

banks and financial institutions to take on more risks, leading to the creation of complex
financial instruments that were difficult to understand and manage.

Thirdly, the interconnectedness of the global financial system meant that problems in one
sector could quickly spread to others, leading to a systemic crisis.

b) Two firms that were heavily involved in the 2008 financial crisis are Lehman
Brothers and AIG.

When the housing market collapsed, Lehman Brothers' assets became almost worthless,
leading to its bankruptcy in September 2008.

AIG, on the other hand, was a large insurance company that had sold credit default swaps on
mortgage-backed securities, essentially betting that the housing market would continue to
perform well. When the market collapsed, AIG was unable to meet its obligations, and had to
be bailed out by the US government.

To protect themselves from the risks that befell them, both firms should have taken a more
cautious approach to risk management, and should have diversified their investments across
different asset classes and markets. They should have also been more transparent in their
dealings, and should have provided more information to regulators and investors about their
exposure to risky assets.

c) Governments around the world played a significant role in the 2008 financial
crisis.

In some cases, governments had pursued policies of deregulation and liberalization that had
contributed to the crisis. In other cases, governments had failed to adequately regulate
financial institutions, or had not intervened quickly enough to prevent the crisis from
spreading.