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 class 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 bleachers (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 stand at the fair (not using a deep fryer, food safety training, event insurance, a $\$20$ cushion for unexpected expenses).

Explain what a plan B is and how it differs from insurance. Take the example of the school's outdoor concert: describe a reasonable plan B for rain and explain why having it written down before the event avoids making wild decisions on the day itself.

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 line; (d) setting aside $\$200$ in case equipment gets broken.

Insuring the concert's sound equipment ($\$800$) costs $\$45$ for the day of the event. The likelihood of something breaking, according to previous years, is $1$ in every $10$ events, with an average damage of $\$300$.

1. a) Calculate the expected loss per event (likelihood times damage) and compare it with the price of the insurance.
2. b) With that calculation in front of you, decide whether you would buy the insurance and explain which non-numerical argument could tip your decision (peace of mind, who is responsible if something happens).

The school market is held outdoors. A Plan B with a covered tent costs $\$30$ out of the total budget of $\$200$. If it rains without a tent, lost sales are estimated at $\$150$; 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 tent.
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?

Define premium, policy, claim, and coverage in your own words, and apply them to this case: Bea pays $\$30$ per year to insure her bike against theft; it gets stolen and the insurer pays her $\$250$ because the policy covered theft away from home.

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