Risk Management in Banking and Insurance

Course leader: Nataliia Versal, Vasyl Erastov

Home Institution: Taras Shevchenko National University of Kyiv

Course Overview

The course's primary goal is to create the knowledge, understanding, and key skills to be proficient in risk management in banking and insurance institutions.

The ‘Risk Management in Banking and Insurance’ course's subject-matter is an overview of best practices in identifying, monitoring, and managing the different risks faced by the banks and insurance companies.

The course is to:

  • explain the causes and nature of risks in banking and insurance;
  • introduce techniques for identification, evaluation, and analysis of risks in banking;
  • introduce the theory and practice of risk management in banks and insurance companies;
  • provide an overview of current risk-based regulation (Basel approaches and Solvency-II);
  • introduce methods for risk treatment, transfer, tolerance, and termination;
  • offer a comprehensive and balanced approach to risk management;
  • highlight modern approaches to risk management;
  • explain the influence and the results of digitalization on risks and risk management.

Learning Outcomes

By the end of the course students

should be able to:

  • discuss and evaluate the risks which banks and insurance companies face and explain how these risks are managed with particular focus on techniques of asset and liability management;
  • discuss the role of securitization in credit risk mitigation;
  • use gap-analysis in management of interest rate risk, liquidity risk, and foreign exchange risk;
  • calculate VaR, CVaR, volatility, beta coefficient (stocks case);
  • calculate and analyze financial dollarization and use VaR approach to its modeling;
  • estimate liquidity and solvency levels of insurance companies.

will improve:

  • skills in decision making in face of uncertainty;
  • communication skills;
  • teamwork skills;
  • problem solving skills.

Course Content

Part 1. Risk Management in Banking

Day 1.  Banking Risks

Uncertainty, risk, and exposure to risk. Types of risks. Investigation of the principal risks in banking, including credit risk, liquidity risk, interest rate risk, market risk, foreign exchange risk, and operational risk.

Day 2. Credit Risk: Standalone and Portfolio Risk Management

Policies for managing credit risk. Management policies to reduce credit risk. Analyzing credit risk: loan portfolio structure; loan portfolio review. History and growth of securitization. Leveraged structures and inappropriate asset classes. Review of securitized products. The players, their contributions and commitments. The rationale for securitization: benefits for the originator, principles of credit enhancement, basic structuring rules.

Day 3 - 4. ALM Overview: Liquidity Gap, Interest Rate Gap, Foreign Exchange Rate Gap

ALM building blocks: standalone risk; portfolio risk. The definition of liquidity gaps. Static and dynamic gaps. Liquidity gaps and liquidity risk. Liquidity gaps and maturity mismatch. Liquidity management: funding a deficit. The definition of interest rate gaps. Interest rate gap and variations of the interest margin. Interest gap calculations. Cumulative and marginal gaps. The interest margin variations and the gap time profile. Interest rate gaps and hedging. Financial dollarization, foreign exchange gap, foreign exchange gap modeling (basic approach).

Day 5. Market Risk Management (Stocks example)

Measuring market risk: standalone and portfolio risks. VaR, CVaR, volatility, beta coefficient.

Part 2. Risk Management in Insurance Industry

Day 1.  Specific and common risks of Insurance Industry

Uncertainty as a part of insurance, risk taking and managing. Types of risks in insurance industry. Brief characteristics of underwriting risk, market risk, credit risk, liquidity risk, operational risk and why are they different from other industries.

Day 2. Introduction to Insurance Industry Risk Management

Underwriting and actuarial calculations as a part of Risk Management of Insurance Company. How to manage own and accepted risks? Operational and commercial risks. Main approaches to risk analysis of Insurance activities

Day 3 - 4. Liquidity, solvency and financial stability of insurers

Differences between liquidity, solvency and stability of Insurance company. Solvency II as a guidance to mitigate risks. How to calculate indicators of liquidity, solvency, financial stability. Capital requirements and necessity of adequate reserves. Early warning and modern approaches to monitor risks.

Day 5. Other Risks of Insurance company

Compliance and reputational risks. Digitalization risk or opportunity? Pandemic as an example of force major risk.

Instructional Method

Lectures&seminars, interactive teaching, discussions, case studies, supporting videos, collaborative teamwork, poster presentation.

Required Course Materials

Facilities: laptops, Internet connection, multimedia projector.

Required readings and useful links:

  1. Basel III: international regulatory framework for banks URL: https://www.bis.org/bcbs/basel3.htm?m=3%7C14%7C572.
  2. Bessis, J. (2015). Risk Management in Banking. 4th ed. John Wiley & Sons Inc.
  3. The future of bank risk management. URL: https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/risk/pdfs/the_future_of_bank_risk_management.pdf.
  4. Kaminskyi A., Versal N. (2018). Risk management of dollarization in banking: case of the Eastern Partnership countries. Montenegrin Journal of Economics. Vol. 14. №. 2. P. 21-40. URL: https://ideas.repec.org/s/mje/mjejnl.html.
  5. Koch T.W., MacDonald S.S. (2010). Bank Management. South-Western, Cengage Learning.
  6. Insurance companies’ specific risks. URL: https://www.atlas-mag.net/en/article/insurance-companies-specific-risks.
  7. Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) URL: https://eur-lex.europa.eu/eli/dir/2009/138/oj.
  8. Erastov V. (2017). Business process reengineering in insurance, production and distribution. Magyar Tudományos Journal. №6(2017), p.30-34. URL: http://magyar-journal.com/wp-content/uploads/2017/05/Magyar-Tudom%C3%A1nyos-Journal-28.04.2017.pdf.
  9. Rejda, George E. and Michael J. McNamara, (2016) Principles of Risk Management and Insurance, 13th ed. (Boston: Pearson).
  10. René Doff, (2015) Risk Management for Insurers, Third Edition (Risk Books)

Assessment

Team Project (40%)

Get acquainted with the prominent trends expected in risk management in banks explained in McKinsey Working Papers on Risk ‘The future of bank risk management’ (you can find the link in course materials). Assess how strong these trends are for banks in your country. Present your results on a poster. The research paper can be prepared by a group of up to three students. The presentation of the poster is within 15 minutes, and its discussion lasts up to 20 minutes.

Essay (25%)

Written essay about the main consequences of Solvency II implementation on given (mostly domestic) or chosen (if it is not implemented on domestic) insurance market. The results should be provided by each student before the end of the course.

Quiz (15%)

Final Test (20%): tests, true/false statements, practical tasks.