Understand business credit and risk management.
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Understand risk management and insurance.
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Topics
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• Types of risk
Ways to handle risks
Business Insurance
Uninsurable risks
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Types of Risk
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• 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:
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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
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• 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
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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
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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
 Avoid
 Transfer
 Insure
 Assume
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Ways to Handle Risks
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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 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
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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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Hospital insurance
 Classified as medical insurance.
 Covers for most or all of the charges during a stay in the hospital.
Surgical Insurance
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Covers all or part of the surgeon’s fees for an operation.
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Health Insurance Coverage continued
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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 may be obtained through employer related groups. They include:
 Group health insurance
 Managed care plans
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Health Maintenance Organizations (HMO)
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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
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 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 Principles
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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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