Reading Assignment on Web

Lesson 17 FIN 403Announcements

1. Final marks for FIN 401 will be available by Friday.2. Marking Scheme for FIN 403 will be weighted

towards Bonus and Participation and less on Quizzes. Show the Tracking Sheet.

3. Review the directions to earn marks. Show the screen capture of the directions on the website (more than one person from each group will have access to the website and can distribute the electronic version with links).

4. Distribute the Hook.

See the first link titled, Participation and Bonus Marks – Multi Media Resources

Learning Objectives1. To develop the concept and practice of a five-stge

prersonal risk-management process:a. Identifyb. Evaluatec. Controld. Financee. Monitor

2. To understand the theoretical role of insurance in financing personal risks.

Risk management is a life skill.Where is risk management useful?a) Personal financesb) Healthc) Personal safetyd) Businesse) National securityf) Environmentg) Others…

Speculative RiskSpeculative Risk involves loss and gain, but in uncertain

amounts.a) Lottery Tickets have almost no chance of winning and

you will almost always lose your bet.b) Common shares (investments) offer unknown

dividends (profits) and the potential to lose the entire investment.

c) It is a risk to quit a secure job and start your own business, however the risk is lessened if you are well prepared.

Each of these examples may cost you money or make yo money.

SpeculationThe formal financial definition of ‘speculative risk’ does not

include gambling.Speculative Risks have a probability of winning and a

probability of losing. Think about math classes and probability formulas. The more information you have about a problem, the more likely you will be to choose to stay away from the problem road and choose the road to success.

Question. I want to invest in oil. Should I choose companies that are exploring, with the potential for new profits, in the Atlantic Ocean of Newfoundland, Canada, or in the desert of Libya?

Why.

Pure RiskPure risk involves the possibility of loss, only. Early

death, disability and theft of your car are all pure risks.

Pure risks are ones that happen to us without us having made a conscious choice to see them out. This is different that speculative risk, where we will have investigated and researched and weighed the potential for gain and loss.

The 5 Step Process to Managing RiskStep 1

Question. Many people do not think about risks. What are some common mistakes that people make?

They say, “It won’t happen to me.” They don’t know the difference between types of

protection and do not assess their own need before going shopping.

They listen to a salesperson who is very good at showing the positives which will benefit the commission sale and fail to look insightfully at needs of the client / customer.

Step 1 (continued)

Question. What are the 3 life-cycle changes as related to risk and the need for insurance?

a) Personal or life and healthb) Propertyc) Liability to others for our actionsWhat are some examples of different life-cycle risks?d) Your parents may be dependent upon you for health

care and financial support.e) Disabled child. Who can summarize our previous

discussion about my friend with a child with a serious disability? Bonus…

Third Party LiabilityMost people are only familiar with third party liability.Example: Automobile / car insurance. Mandatory in Canada.If we cause another person a loss, we are liable /

responsible for the other person’s losses.Example: If you accidentally kill someone, you will may

be responsible for the present value of their lifetime earnings.

Example: Property damage. If I did not cut down a tree that was likely to fall, and it falls onto power lines, I will be responsible for cost to repair the lines.

Common Law as it applies to TortsCommon Law = Determined by court decisions over a long

period of time, rather than by statutes (law makers / politicians).

Tort = Legal wrongs or injuries one person causes another.The court will not find you responsible for someone else’s

losses as long as you take reasonable care.Example: a hurricane blows down a healthy tree, on your

property, onto your neighbors car is different than if a minor wind storm blows down an obviously unhealthy tree. In the second case, if your neighbor had insurance to cover a tree falling on his car, his insurance company would take legal action against you to reimburse their expenses incurred in repairing his car.

Tort law and businessLimited (incorporated) Companies: as the name implies, the

responsibility is limited to the company and not the individual investors in the company, beyond the amount they invested. Companies have insurance to protect their investors.

Unincorporated businesses and professionals are personally liable without limit for losses they cause. They risk everything they own, including their homes, retirement investments, etc. They may have insurance, but if they failed to take the proper precautions, the insurance company will not pay and the individual will be responsible.

Welcome to the world of taking responsibility for your own actions!

In class exercise and group homeworkOpen your note books and prepare to write your observations.

While watching the video, write down the risks that you see. Be prepared to explain why they are risks and how you could protect yourself from liability?Assignment: You have been contracted to walk the property, identify the risks and write up your observations and recommend solutions in a professional report. You can use anything that Mr. Silver says in class, in your paper. You will only see the video once so if you choose to use your imagination when writing, please do so, but be realistic. The paper should be approximately 2 pages in length. The format: All papers must include a cover page with Name, Student Number and email address of each group member. Due date: Friday November 28th. Hard copy only. No email submissions. The best paper(s) will read to the class as an example of good work and future expectations. This exercise can be found on the website.