Managing financial risk and insurance

Explain the difference between an unforeseen event (you didn't know it could happen) and a risk (you knew it could happen, but not when). Classify: it raining on the day of the April fair, a member falling ill, smoke coming out of the school's electrical panel. Which one could be best prepared for?

Define the likelihood and the harm (impact) of a risk with two examples from the end-of-year trip: one with high likelihood and little harm, and one with low likelihood and great harm. Explain why the second deserves more attention even though it is rare.

The figure shows a risk matrix for the school flea market: each risk is positioned according to its likelihood of occurring and the damage it would cause. Three risks are already placed, and you must locate a fourth one, marked with a question mark.

1. a) Explain why "fire in the venue" is in the upper left and "staining a poster" is in the lower left.
2. b) Place the question mark: "losing the cash box with the day's proceeds" is unlikely but would ruin the project. Which two risks deserve a protection plan before the others? Justify your answer.

The school's sports tournament involves these risks: injuries (medium likelihood, high harm), teams dropping out (medium, medium), losing balls (high, low) and vandalism in the stands (low, high).

1. a) Draw in words the likelihood × harm matrix and order the four risks by priority of attention.
2. b) Assign each one a concrete strategy (avoid, reduce, transfer or accept) and justify the one for the highest-priority risk.

You can do it on paper and send a photo with your answer.

Name the four strategies when facing a risk (avoid, reduce, transfer, accept) and give an example of each applied to setting up a food stall at the fair (not using a deep fryer, hygiene training, event insurance, a $20\ \text{€}$ cushion for unexpected expenses).

There are four strategies when dealing with a risk: avoid it (do not carry out the activity), reduce it (make it safer), transfer it (pay for insurance), or accept it (keep a financial buffer just in case). Classify these decisions for a summer camp and justify your choices: (a) cancelling a canyoning trip due to a storm warning; (b) taking out accident insurance for the camp; (c) providing helmets and instructors for the zip wire; (d) setting aside $200\ \text{€}$ in case equipment gets broken.

The school market is held outdoors. A Plan B with a covered marquee costs $30\ \text{€}$ out of the total budget of $200\ \text{€}$. If it rains without a marquee, lost sales are estimated at $150\ \text{€}$; the likelihood of rain that month is $1$ in $4$.

1. a) Calculate the expected loss due to rain (likelihood multiplied by impact) and compare it with the cost of the marquee.
2. b) Decide whether you would go ahead with Plan B and justify your decision using the numbers and at least one non-numerical argument.

Explain with a simple example how insurance works: many people pay a small amount (premium) so that if something major happens to one person (a claim), the insurer covers it. Why is this profitable for the insurer? What does the policyholder gain even if nothing ever happens to them?

Insuring your phone worth $240\ \text{€}$ costs $24\ \text{€}$ per year. According to your track record, the likelihood of breaking it in a year is once every $5$ years.

1. a) Calculate how much you pay in premiums over $5$ years and compare it with the cost of replacing the phone once.
2. b) Based on those figures, is insurance worth it in your case? What else should you consider besides the calculation (excess, what is covered, whether you could pay for a new phone out of pocket)?

Read the small print of this fictional school policy: it covers damage to sports equipment up to $500\ \text{€}$ a year, an excess of $40\ \text{€}$ per claim, a maximum of $2$ claims a year, and it does not cover losses or thefts without violence. The basketball club loses $60\ \text{€}$ worth of balls a year and once had the first-aid kit ($70\ \text{€}$) stolen.

1. a) Explain what the policy would and would not have covered last year and calculate how much the insurer would have paid for the first-aid kit.
2. b) Write three questions you must ask before signing a policy like this and explain what trap there is in looking only at the premium.