Question

Japan Inc. is exporting machinery to a Russian company and needs to get insured because of the political risks involved with doing business in a high-risk country. However, the insurer will not fully cover the insurance needed because of the high risk and will require Japan Inc. to be insured via a risk sharing method. Identify and explain two risk sharing methods. The answer should be long.it is for 12 marks.

Answer 1

As ipeople ibegin ito iage, ithey iusually iencounter imore ihealth irisks. iManaging ipure irisk ientails ithe iprocess iof iidentifying, ievaluating, iand isubjugating ithese irisks—a idefensive istrategy ito iprepare ifor ithe iunexpected. iThe ibasic imethods ifor irisk imanagement—avoidance, iretention, isharing, itransferring, iand iloss iprevention iand ireduction—can iapply ito iall ifacets iof ian iindividual's ilife iand ican ipay ioff iin ithe ilong irun. iHere's ia ilook iat ithese ifive imethods iand ihow ithey ican iapply ito ithe imanagement iof ihealth irisks. i i

1. Avoidance imeans inot iparticipating iin iactivities ithat icould iharm iyou, iin ithe icase iof ihealth, ismoking iis ia igood iexample.

2. Retention iacknowledges ithe iinevitability iof icertain irisks, iand iin iterms iof ihealth icare, iit icould imean ipicking ia iless iexpensive ihealth iinsurance iplan ithat ihas ia ihigher ideductible irate.

3. Sharing irisk ican ibe iapplied ito ihow iemployer-based ibenefits iare ioften imore iaffordable ithan iif ian iindividual igets itheir iown ihealth iinsurance.

4. Transferring irisk irelates ito ihealthcare iin ithat ithe icost iof ithe icare iis itransferred ito ithe iinsurer ifrom ithe iindividual, ibeyond ithe icost iof ipremiums iand ia ideductible.

5. Loss iprevention iand ireduction iare iused ito iminimize irisk, inot ieliminate iit—the isame iconcept iis iused iin ihealthcare iwith ipreventative icare.

Risk iSharing i— ialso iknown ias i"risk idistribution," irisk isharing imeans ithat ithe ipremiums iand ilosses iof ieach imember iof ia igroup iof ipolicyholders iare iallocated iwithin ithe igroup ibased ion ia ipredetermined iformula. iRisk iis iconsidered ito ibe ishared iif ithere iis ino ipolicyholder-specific icorrelation ibetween ipremiums ipaid iinto ia icaptive, ifor iexample, iand ilosses ipaid ifrom ithe icaptive's ireserve ipool.

Risk iis ithe iprobability iof ian ievent ioccurring iin ia igiven itime iperiod. iIt's iimportant ito iremember ifrom ithe ioutset ithat, iin ithis icontext, irisk irefers ionly ito ian ioccurrence iand inot inecessarily ian iadverse ievent. iWith ithat iin imind, irisk isharing idoesn't imean ipushing ithe ithreat iof ibad ioutcomes ioff ion isomeone ielse. iRather, iit imeans ireducing ithe ilikelihood iand iimpact iof iuncertainty.

Here iare ia ifew iexamples iof ihow iyou iregularly ishare irisk:

1. Auto, ihome, ior ilife iinsurance, ishares irisk iwith iother ipeople iwho ido ithe isame.

2. Taxes ishare irisk iwith iothers iso ithat iall ican ienjoy ipolice, ifire, iand imilitary iprotection.

3. Retirement ifunds iand iSocial iSecurity ishare irisk iby ispreading iout iinvestments.

Sharing irisk iis ioften iimplemented ithrough iemployer-based ibenefits ithat iallow ithe icompany ito ipay ia iportion iof iinsurance ipremiums iwith ithe iemployee. iIn iessence, ithis ishares ithe irisk iwith ithe icompany iand iall iemployees iparticipating iin ithe iinsurance ibenefits. iThe iunderstanding iis ithat iwith imore iparticipants isharing ithe irisks, ithe icosts iof ipremiums ishould ishrink iproportionately. iIndividuals imay ifind iit iin itheir ibest iinterest ito iparticipate iin isharing ithe irisk iby ichoosing iemployer ihealth icare iand ilife iinsurance iplans iwhen ipossible.

The iRussian ieconomy, iwhich ihas itransformed ifrom ia iplanned ito ia imarket ieconomy ionly iin ithe inineties, iis istill inot ias istable ias imost iWestern iEuropean ieconomies. iThere iis ia ihigh ivolatility iin icompanies iappearing iand idisappearing. iFrom iabroad, iit iis ioften idifficult ito iassess ithe icredit iscore iof ia icertain ifirm. iTherefore, iwe irecommend iSwiss icompanies ito isecure icarefully itheir ifinancial irisks iwhen iexporting.

Risk imanagement ifor iexport idiffers ifrom idomestic irisks idue ito ithe imultiplication iof ipossible icauses iof ioutstanding iinvoices. i

With iexport, ithe ifield iof ioutstanding icases iis imuch iwider iand ithey ido inot inecessarily ilinked ito ithe icreditworthiness iof ithe ibuyer, iwhich ican ialso ibe imuch imore idifficult ito iassess idue ito ithe ilack ifinancial iinformation.

Commercial ior icredit irisk

At iexport ias ithe idomestic imarket, ithe ifailure iof ithe ibuyer igenerates iunpaid iinvoices. iThe inature iof ithis irisk idepends ion ithe ilocal ilegislation ion ibankruptcies

Political irisk

It iis ithe irisk iof ioccurrence iof ipolitical ievents i(war, isocial iinstability, ibankruptcy iof istate i... ietc.) iin ithe ibuyer's icountry iwhich imay iaffect ithe iinterests iof ithe iseller, ithat iare ieconomic iand i/ ior ihuman. iThis itype iof ievent ican idisrupt ior icancel itrade itransactions ito ithe idetriment iof ithe iseller iand igenerate ioutstanding iinvoices. iThis irisk iapplies ito iprivate iand iespecially ipublic ipurchasers.

Currency iexchange irisk

When ithe icurrency iof ithe iseller iand ithe ibuyer iare idifferent, iany ichange iin ithe iexchange irate ihas inegative ieffects ion ione iof ithe itwo iactors. iIf ithe isale iis imade iwith ithe icurrency iof ithe ibuyer, ithe irisk iis isupported iby ithe iseller iwho ican isee ithe ibenefits iof ithe isale imelting idue ito idevaluation iof ithe icurrency iof ithe icustomer. iThe ievolution iof ithe iexchange irate ican ihave iseveral ieconomic iand ipolitical ibackgrounds ithat iare inot inecessarily ipredictable.

Bank irisk

This iis ithe irisk ithat ia ibank idoes inot imeet iits icommitments ior ibecause iit iis inot iimpartial i(connivance iwith ithe ibuyer), ior ibecause iit iis inot isolvent. i

If ithis iis ithe icase, iguarantees iobtained ifrom ithem imay inot ibe ihonored, iwhich ican ilead ito ioutstanding. iProblems iare icommon iconcerning itransactions iby icash iagainst idocuments ior iletter iof icredit i(without iconfirming iand inotifying ibank)

Delivery irisk

The iIncoterm idefined iduring icommercial inegotiation ihas ia imajor iimpact ion ithe iresponsibility iof iactors iincluding ithe iseller iin ithe idelivery iof ithe igoods. iIt ican ibe ibrought ito ibear ihazard ibeyond iits icontrol iif ithe itransfer iof iresponsibility iwas ipoorly inegotiated.

Risk imanagement i

The ipayment iin iadvance

Get ithe ipayment iof ian iorder ibefore idoing ithe idelivery ior ithe iservice irequested iis ithe ieasiest iway ito iavoid iany irisk iof idefault ipayment.

The ionly iproblem iis ithat ithis imode iof ipayment iis ivery irestrictive ifor iyour icustomers iespecially iif ithey iare iin ia iprecarious ifinancial isituation iwith itight icash. i

Under ithese iconditions iit iwill ibe idifficult ito iestablish isustainable ibusiness irelationships. iThat's iwhy iit iis isometimes ibetter ito irequest ia i"partial ipayment iin iadvance" ialso icalled ia idown ipayment. iThe iorder iamount ipercentage iof ithe idown ipayment idepends ion ithe icredit ilimit iallowed ito iyour icustomer iand ithe icommercial inegotiation.

The idocumentary icredit

The idocumentary icredit iis ia ipayment imethod iinvented iin ithe ibeginning iof iinternational itrade iduring iantiquity. iIt iwas iintended ito isecure iMediterranean itrade iat ia itime iwhen idelivery itimes iwere ivery ilong iwith ilarge iuncertainties i(wars, idiseases, irisky itransport i... ietc.).

The iletter iof icredit

The iletter iof icredit iis ioften iequated iwith ithe idocumentary icredit iwhich iit idiffers iby ithe iabsence iof iadvising iand iconfirming ibank. i

This iassimilation iis ian iabuse iof ilanguage ithat ican icause iconfusion ibecause iin imany icases ithe idegree iof icredit irisk icoverage iprovided iby ithe iletter iof icredit iis ilower ithan ithe ione iprovided iby ithe idocumentary icredit.

Methods iof irisk isharing

Diversifying iRisk

One istrategy ifor isharing irisk iis ito idiversify. iTo ian iinvestor, idiversify imeans ito iput ia ilittle imoney iin ia ilot iof iplaces iso ithat ithe idemise iof ione iinvestment idoesn't iwipe iout ithe iinvestor. iThat istrategy ihas ia idirect icorollary iin ibusiness irisk. iIn ithis istrategy, ia ibusiness ior iproject ileader iallocates iresources iso ithat ia iproblem ior idisruption ihas iminimal iimpact ion iother iaspects iof ithe ibusiness.

Outsourcing iRisk

A isecond icommon istrategy ifor irisk isharing iis ioutsourcing. iOutsourcing imeans itaking ia ibusiness iunit ior ifunction, iremoving iit ifrom ithe iorganization iitself, iand isubsequently icontracting ianother ientity ito ido ithe iwork. iIn imany icases, iwhen iyou ioutsource iservices, iyou iare ialso ioutsourcing irisk. iThis iis iespecially itrue iwhen ithe ioutsourced ifunction iis ialready ifar ioutside ithe ibusinesses icore icompetency iand iprimary imission.