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Objective 5.02
Understand risk management and insurance.
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YouTube - Risk is our Business
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 lossExample: A competitor of Staples, an office supply
store, moved right across the street.
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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 lossFire, 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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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 insureUninsurable 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 policyInsured – 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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