BUSINESS RISKS AND INSURANCE

BY

ANAM RAFIQUE, NAILA RAFIQUE ,

FAIZA JAMIL, NOOR-UL-AIN, IRAM SHAHZADI

AND

UZMA BATOOL

Definition of business

According to James Stephenson,

“Every human activity which is engaged in for the sake of earning

profit may be called business”.

What is risk?

• Risk – the possibility of loss• or injury • Business risk – risk of loss

that is naturally incurred by owing and operating a business

TYPES OF BUSINESS RISKS

• Insurable vs. uninsurable risk• Controllable vs. uncontrollable risk

Pure riskEconomic riskHuman riskNatural risk

OTHER TYPES OF RISK

PURE RISK

o Threat of loss with no opportunity for gain

Examples

Employee theft

Burglary

Bad checks

Accidents

Involving Customers or employees

Economic risk

• Occurs when there is likelihood of financial loss

• May result from changes in overall business conditions

EXAMPLE

• If a competitor offers more features, other businesses need to change their product or face losses

Human risk

• Risk of harm caused by human mistakes, dishonesty or other factors attributed to people

EXAMPLES

• Customer dishonesty• Fraudulent payment• Theft incompetence of employees

Natural risk

• The possibility of a catastrophe caused by natural elements that can cause damage of loss or property

EXAMPLE

• Floods• Tornados• Hurricanes• Fires• Lightning• Droughts• Earthquakes etc.

Types of businesses

Small scale businesses

Medium scale businesses

Large scale businesses

Small businesses

Number of people in small businesses are less than 100Annual revenue is less than $ 7 million

Common risks in small businesses

• Breakdown of machinery and equipment• High employees turnover or loss of key staff

members especially if they have unique skills• Security of data and intellectual property• theft

Common risks

• Bad debts creating customers• Increase in competition• Negative cash flow• Natural disasters such as fires and storms

Medium scale business

• Number of people in such businesses is from 100 to 500

• Annual revenue is between $7 million to $35 million dollar(estimate)

COMMON RISKS

Intellectual property

Theft

Increased competition

Common risks

• Operational risk• Political risk• Country risk• Technological risk• Environmental risk• Economic risk• Financial risk • Terrorism risk

Large scale businesses

• Number of people in such business organization is more than 500

• Annual revenue is more than $35 million (estimate)

Flood Earthquake

Natural causes are beyond the control of humansNatural disasters can lead to huge losses in businessWhich mainly occur due to natural calamities such as

earthquakes and flood etc.

NATURAL CAUSES

Strikes, dishonesty, carelessness are examples of human causes of business risk

Dishonesty of employees, misappropriation of cash and theft of goods may also become a cause of loss for business

HUMAN CAUSES

Which is caused mainly due to fluctuation in the market prices of various commodities

Inflation and unemployment are examples of economic causes of business risk

Trade cycle and other unforeseen changes in the economy may also create business risks

ECONOMIC CAUSES

Assets used in business may depreciate in value Technical changes and mechanical defects also result

in business risks

PHYSICAL CAUSES

Some political events can change the business scenario

A major policy change by government can change the business environment

Changes in the taxation policies create uncertainty and loss

political disturbances such as fall of government and civil war etc. may lead to heavy loss in business

POLITICAL CAUSES

Methods Of Risk ProtectionReducing or eliminating the risk

Efficient management

A reserve cash

Shifting of risks

Reducing or eliminating risk

Efficient management

A reserve cash

Shifting of risk

INSURANCE

Introduction

Contract between two parties Process of collecting money Compensation to losses

DEFINITION

According to Oxford Dictionary,“Insurance means undertaking, by a company, society or the state to provide safeguard against loss, provision against sickness, death, etc. in return for regular payments.”

MAIN POINTS OF DEFINITION

An undertaking Safeguard

Benefits of insurance to individualsPeace of mindAversion of riskProtects mortgaged propertiesProvides self dependencyTool of savingsTool of investment

Benefits of insurance to business

• Reduce reserve requirements• Capital freed for investment • Reduction of uncertainty• Loss control activities• Business and social stability

Benefits of insurance to society Protects wealth of country Helps in economic growth Control inflation

PRINCIPLES OF INSURANCE

• Utmost good faith• The principle of

indemnity• Proximate cause• Mitigation of loss• Arbitration

Utmost good faith

• Contract between insured and insurer• Both parties should disclose all facts to each

other• A false information or non disclosure of

material facts makes the contract invalid

The principle of indemnity

• All insurance contracts, except life insurance are the contract for indemnity

• The assured shall be compensated in case of loss only

• The insured is not allowed to receive a higher amount than the amount of loss

Proximate cause

An insured person can recover the only when it is caused by any of the risk insured against. e.g.

cargo of wheat and rats

Mitigation of loss• Insured should take all reasonable steps to

minimize the amount of loss• He can recover the same from insurer if

he suffer loss in doing so.• If he does not take care, his claim might

be lost

Cancellation

• Both parties have right to cancel or terminate the insurance before its expiry date

• Their relationship come to an end on the date of cancellation of policy

Life insurance

Life insurance

We can define life insurance as a contract in which insured person pay regular premium to the insurer i.e. insurance company

On the death of the insured or at the maturity period, the insurance company pay the compensation or the matured sum respectively

Marine insurance

This insurance is done by businesses for safety delivery of goods, while transferring goods from one place to another by sea way, land way, air way

Fire insurance

Fire insurance

Fire insurance is an insurance that cover property such as home, shop and other fixed asset protection against fire, burn etc.

It also cover distraction of property due to fire

Which companies provide insurance in Pakistan

• Adamjee insurance company limited(Karachi)• Alpha insurance company limited (Karachi)• Fins insurance company limited • The united insurance company of Pakistan ltd• Asia insurance company limited• Premier insurance company limited• Reliance insurance company limited• Universal insurance company limited

PROBLEMS OF INSURANCE IN DEVELOPING COUNTRIES

Economic Backwardness

Poverty

IlliteracyReligious

beliefs

Trend of Insurance

Economic backwardness

• Lack of resources• Limited scope of business activities• Lack of professional management

POVERTY

Lack of savings Basic needs of life

ILLITERACY

Illiterate majority Ignorance Views of people

RELIGIOUS BELIEFS

Varying opinions of religious scholars Deep attachment to scholars People considered it to be a form of Riba

TREND OF INSURANCE

No fore sightness Legacy of people

Conclusion

Our visit O To

state life insurance company limited

ANY QUESTION