Objective 5.02
Understand risk management and
insurance.
YouTube - Risk is our Business
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Topics
•
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Types of risk
Ways to handle risks
Business Insurance
Uninsurable risks
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Risks & Risk Management

What is risk?

The possibility of
incurring a loss.

What is risk
management?

It is a systematic
process of managing
risk to achieve set
objectives.
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Types of Risk
•
Different types of risk:
Economic and non-economic
 Pure risk and speculative
 Controllable risk and
uncontrollable
 Insurable risk and uninsurable

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Types of Risk -Economic
 Results
in financial loss.
 Three categories of economic loss:
Personal risk – Result in personal losses
 Property risk – Loss of personal or business
property including money, buildings and
vehicles.
 Liability risk – Harm or injury to other people or
their property because of your actions.

 Example: Fred’s Diner incurred a loss due to a fire.
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Examples of Economic Risks
Personal risk –
Alex went snowboarding at Snowshoe and broke
his leg. The hospital bill was $1400.
 Property risk –
Harding invested in stock market and lost money
when his stock’s value dropped.
 Liability risk –
A customer slipped on spilled water in the store
aisle before an employee cleaned the spill.

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Types of Risk
Non-economic Risk

May result in embarrassment or inconvenience
without financial impact.
 Examples:
Requesting customers to move to another
check-out lane.
 Inviting a guy to the Sadie Hawkins Dance

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Types of Risk
•
Pure Risk
 Threat
of a loss without an opportunity
for gain.
 Examples:


Frost damages your strawberry patch.
Mona drives to work every day.
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Types of Risk
•
Speculative Risk
 Offers

the chance of gain or loss.
Example: Mary opened a shoe store that
operated for only six months.
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Types of Risk
Controllable Risk
 Occurs when conditions can be
controlled to lessen the chance of harm.
Examples:
 Sears installed centralized customer
service stations in order to increase
convenience.
 Will travels by motorcycle to school, wearing
a helmet and leather jacket.
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Types of Risk
•
Uncontrollable Risk

Cannot be controlled or reduced by your
actions.

Example: Riding along a highway with other
speeding automobiles. You can control your
driving but not the other drivers.
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Ways to Handle Risks
•
Transfer the risk
Allowing someone else to assume the risk.
Examples:

A book company has a contract for a trucking
company to transport its books.
 Joan rides the bus to work.

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Insurable Risks
•
Insurable Risk
Meets criteria of an insurance company for
coverage.
 Examples:

An artist purchased property insurance to cover
his collection.
 Owner purchased liability insurance for the
business.
 Automobile insurance is purchased to cover
liability and property damage risks

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Unpredictable Risk
Unpredictable amount of loss
Example:
 A competitor of Staples, an office supply
store, moved right across the street.
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Ways to Handle Risks
 Avoid
 Transfer
 Insure
 Assume
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Ways to Handle Risks
•
Avoid the risk

Declining to engage in particular activities.
Example:
 A book company declines an order to produce
6000 books in one day.
 Goggle, Inc. declined expanding their business
into a new city.
 Joan does not drive a vehicle for fear of having
an accident.

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Ways to Handle Risks
•
Transfer - Insure the risk

Purchasing insurance to cover risk.
Example: General Electric sells insurance to
customers to cover their appliances.
 A book company has a life insurance policy on
its key employees.
 Kyle insures his auto for property damage since
he still owes money to the bank.

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Ways to Handle Risks
Example:
 Mary runs a coffee shop and offers a variety of
services.
 A & G Inc ‘s company vehicle is paid for and
dropped the property damage (comprehensive &
collision) insurance.
 Tom signed for a $10,000 loan for new
equipment.
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Business Insurable Risks
 Businesses
share risks with other
businesses by purchasing insurance
Insure personnel (human resource)
 Insure property (assets of business)
 Insure business operations (future income
of the business)

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Business Insurable Risks
•
Personnel (Labor)



Health insurance provides protection against the
high costs of individual health care.
Disability insurance provides payments to
employees who are unable to work for an extended
period due to serious illness or injury.
Life insurance pays the face amount of the
insurance policy upon the death of the insured.
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Business Insurable Risks- Property
 Insurance
is purchased to protect
business from financial loss due to
damages to their:
Vehicles
 Buildings
 Equipment
 Building contents, including inventory.


Perils that could cause a loss

Fire, theft, vandalism, hail, smoke, ice,
water, windstorm
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Business Insurable Risks- Business
Operations
•
Protection for business operations that
result in accidents, injuries, and property
damage.
Worker’s Compensation Insurance
provides protection for employees who are
injured on the job or become ill because of
the job.
 Liability insurance covers damage to
property of others by employees at work.

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Worker’s Comp
Most worker’s comp
claims require drug
testing before
payment is made.
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HEALTH INSURANCE PROVIDERS
•
Managed Care Plans

Health Maintenance Organization (HMO)



•
Consists of a staffed medical clinic to serve members.
Objective-preventive care
Members are entitled to a wide range of prepaid health care
services, including hospitalization.
Preferred Provider Organization (PPO)



Provides a group of physicians, a clinic, or a hospital that
contract with an insurance company.
Providers agree to charge a set fee for services.
Members are encouraged but not required to use the PPO
services.
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Uninsurable Risks

Some risks are
Too expensive for businesses to insure
 Uninsurable due to nature of risk

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Examples of Uninsurable Risks






Economic conditions
 Recessionary period in economic cycle
Consumer demand
 Service your business provided is going out of style
Actions of competitors
 Walmart opened near small retail stores taking most of
customers
Technology changes
 Old production techniques are replaced by new technology
Local factors
 Large employer closes, employees laid off
Business operations

Unused tobacco fields due to tobacco lawsuits
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Insurance Vocabulary
Policy - contract between the insurer
and insured
 Premium – cost of insurance
 Insurer – company offering policy
 Insured – policyholder who buys a policy

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Insurance Vocabulary
Claim- when policy holder needs insurer
to pay for a financial loss
 Co-pays- the amount the policyholder
owes on a health insurance claim
 Deductible - amount paid by policyholder
before insurance pays
 Face amount- $ value of life insurance
policy

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Health Insurance Coverage
•
Hospital insurance
Classified as medical insurance.
 Covers for most or all of the charges during
a stay in the hospital.

•
Surgical Insurance

Covers all or part of the surgeon’s fees for
an operation.
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Health Insurance Coverage
•
Regular medical insurance
 Covers fees for nonsurgical care given in
the doctor’s office, the patient’s home, or a
hospital.
• Major medical insurance
 Covers cost of extended and specialized
care out of the hospital such as medicine
and special nursing care.
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Health Insurance Coverage
•
Comprehensive Medical Policy
Combines the features of hospital, surgical,
regular, and major medical insurance.
 Most common group health insurance policy

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Health Insurance Coverage

Dental Insurance
Contains deductible and coinsurance to
reduce the cost of premiums.
 Covers examinations, X rays, cleaning and
filling.
 Covers dental injuries resulting from
accidents.
 Covers part of complicated dental work
such as crowns or bridges.

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Health Insurance Coverage
•
Vision Care Insurance
Covers eye examinations, prescription
lenses, frames, and contact lenses.
 Some plans cover the cost of laser eye
surgery that eliminates the need for glasses.

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HEALTH INSURANCE PROVIDERS
Health insurance may be obtained
through employer related groups.
Options include:
Group health insurance
 Managed care plans




Health Maintenance Organizations (HMO)
Preferred Provider Organizations (PPO)
State Government Programs
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HEALTH INSURANCE PROVIDERS
•
Group Health Insurance
Most popular way to buy health insurance
 Companies pay part or all of the premium
for their employees

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HEALTH INSURANCE PROVIDERS
•
State Government Assistance
Workers Compensation provides medical and
survivor benefits for people injured, disabled, or
killed on the job.
 Paid for by employer but required by state
Department of Labor

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Life Insurance Principles
•
Life insurance protects survivors against
financial loss associated with death.
• Two basic types:


Term
Permanent
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Types of Life Insurance

Term Life Insurance
Provides financial protection from losses
resulting from a death during a definite
period of time (term).
 Least expensive form of life insurance.
 Only life insurance that is purely life
insurance without savings and investments.

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Types of Life Insurance

Permanent Life Insurance
Lasts a lifetime as long as premium is paid
 Builds cash value through an investment
feature
 Part of the premium paid is used for
insurance that provides protection
 The insurance company invests part of the
premium
 Examples: whole life, universal life

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Types of Life Insurance

Group Life Insurance
Covers a group of people that work together
 Offers term insurance
 Employer offers coverage through employer
 Individual is covered by their employer

 Ex:
Builders Inc. offers employees group
term life insurance with a policy face
amount of up to 4 times their salary
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