Objective 5.

02
Understand risk management and
insurance.

YouTube - Risk is our Business

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Topics

• 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

 Resultsin 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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