5.02 Classroom

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Essential Standard 5.00

Understand business credit and risk management.

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Objective 5.02

Understand risk management and insurance.

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Topics

• Types of risk

Ways to handle risks

Business Insurance

Uninsurable risks

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Types of risk

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Types of Risk

• 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 continued

• 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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Types of Risk continued

• Non-economic

 May result in embarrassment or inconvenience without financial impact.

 Example: Requesting for customers to move to another check-out lane.

Pure

 Threat of a loss without an opportunity for gain.

 Example: Frost damages a strawberry patch.

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Types of Risk continued

Speculative Risk

 Offers the chance of gain or loss.

 Example: Mary opened a shoe store that operated for only six months.

Controllable Risk

 Occurs when conditions can be controlled to lessen the chance of harm.

 Example: Sears installed centralized customer service stations in order to increase convenience.

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Types of Risk continued

Uncontrollable Risk

 Cannot be controlled or reduced by your actions.

 Example: Riding along a highway with other speeding automobiles.

Insurable Risk

 Meets criteria of an insurance company for coverage.

 Example: An artist purchased insurance to cover his collection.

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Types of Risk continued

• 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

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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 decline an order to produce 6000 books in one day.

Transfer the risk

 Allowing someone else to assume the risk.

 Example: A book company has a contract for a trucking company to transport its books.

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Ways to Handle Risks continued

• Insure the risk

 Purchasing insurance to cover risk.

 Example: General Electric sells insurance to customers to cover their appliances.

 Assume risk

 Finishing an activity and accepting full responsibility

 Example: Mary runs a coffee shop and offers a variety of services.

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Business insurance

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Business Insurable Risks

• Personnel

 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 amount of the insurance policy upon the death of the insured.

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Business Insurable Risks continued

Property

 Insurance is purchased to protect business from financial loss due unsuspectingly damages to their buildings, equipment, and building contents, including inventory.

Business Operations

 Coverage as a result of accidents, injuries, and property damage.

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Types of Uninsurable Risks

 Economic Conditions

 Consumer Demand

 Action of Competitors

 Technology Changes

 Local Factors

 Business Operations

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Health insurance coverage

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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 continued

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 continued

• Comprehensive Medical Policy

 Combines the features of hospital, surgical, regular, and major medical insurance.

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Health Insurance Coverage continued

 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 or all of complicated dental work such as crowns or bridges.

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Health Insurance Coverage continued

• Vision Care Insurance

 Cover 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. They 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

• Managed Care Plans

 Health Maintenance Organization (HMO)

 Consists of a staffed medical clinic to serve members.

 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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HEALTH INSURANCE PROVIDERS

• State Government Assistance

 Workers Compensation that provides medical and survivor benefits for people injured, disabled, or killed on the job.

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Life insurance

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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 or 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 continued

 Permanent Life Insurance

 Has cash value and an investment feature.

 Part of the premium paid is used for insurance that provides protection.

 The insurance company invests part of the premium.

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Types of Life Insurance continued

 Group Life Insurance

 Covers a group of people.

 Offers term rather than permanent insurance.

 Individual is covered by their employer

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