5.02_Risk_Management_Updated.ppt - chriswilliams - home by xiuliliaofz

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									Objective 5.02
 Understand risk management and
 insurance.




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Risks & Risk Management

 l   What is risk?

 l   The possibility of
     incurring a loss.    l   What is risk
                              management?

                          l   It is a systematic
                              process of managing
                              risk to achieve set
                              objectives.
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Types of Risk

       •   Different types of risk:
           Ø Economic and non-economic
           Ø Pure risk and speculative

           Ø Controllable risk and
             uncontrollable
           Ø Insurable risk and uninsurable




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Types of Risk -Economic

 Ø Resultsin financial loss.
 Ø Three categories of economic loss:
       Ø Personal risk – Result in personal losses
       Ø Property risk – Loss of personal or business
         property including money, buildings and vehicles.
       Ø Liability risk – Harm or injury to other people or
         their property because of your actions.
 Ø Example: Fred’s Diner incurred a loss due to a fire.



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Examples of Economic Risks

 Ø Personal risk –
 Alex went snowboarding at Snowshoe and broke
   his leg. The hospital bill was $1400.
 Ø Property risk –
 Harding invested in stock market and lost money
   when his stock’s value dropped.
 Ø 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
   Ø   May result in embarrassment or inconvenience
       without financial impact.
 Ø Examples:
   Ø  Requesting customers to move to another
     check-out lane.
   Ø Putting customers on hold.




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Types of Risk

 •   Pure Risk
 Ø   Threat of a loss without an opportunity for
     gain.
 Ø   Examples:
     Ø   Frost damages a farmer’s crop.
     Ø   Driving to work every day.




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Types of Risk

 •   Speculative Risk
 Ø Offers    the chance of gain or loss.
     Ø   Example: Mary opened a shoe store that
         operated for only six months.




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Types of Risk

 Controllable Risk
 Ø Occurs when conditions can be
   controlled to lessen the chance of harm.
   Examples:
   Ø Sears installed centralized customer
     service stations in order to increase
     convenience.
   Ø Will travels by motorcycle to school, wearing
     a helmet and leather jacket.
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Types of Risk
  •   Uncontrollable Risk
      Ø   Cannot be controlled or reduced by your
          actions.
           Ø   Example: Riding along a highway with other
               speeding automobiles. You can control your
               driving but not the other drivers.




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Insurable Risks

 •   Insurable Risk
     Ø Meets criteria of an insurance company for
       coverage.
     Ø Examples:
         Ø An artist purchased property insurance to cover
           his collection.
         Ø Owner purchased liability insurance for the
           business.
         Ø Automobile insurance is purchased to cover
           liability and property damage risks

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Unpredictable Risk

 Unpredictable amount of loss
   Example:
   Ø A competitor of Staples, an office supply
     store, moved right across the street.




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Ways to Handle Risks

 Ø Avoid
 Ø Transfer
 Ø Insure
 Ø Assume




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Ways to Handle Risks

 •   Avoid the risk
     Ø   Declining to engage in particular activities.
          Ø A book company declines an order to produce
            6000 books in one day.
          Ø Goggle, Inc. declined expanding their business
            into a new city.
          Ø Mike does not drive a vehicle for fear of having
            an accident.




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Ways to Handle Risks

 •   Transfer the risk
     Ø   Allowing someone else to assume the risk.
          Ø   A book company has a contract for a trucking
              company to transport its books.
 •   Insure the risk
     Ø   Purchasing insurance to cover risk.
          Ø General Electric sells insurance to customers to
            cover their appliances.
          Ø Kyle insures his auto for property damage since
            he still owes money to the bank.
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Ways to Handle Risks

 •   Assume the risk
     Ø   Finishing an activity and accepting full
         responsibility.
          Ø   A & G Inc ‘s company vehicle is paid for and
              dropped the property damage (comprehensive &
              collision) insurance.




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Business Insurable Risks

 Ø Businesses share risks with other
   businesses by purchasing insurance
   Ø Insure personnel (human resource)
   Ø Insure property (assets of business)

   Ø Insure business operations (future income
     of the business)




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Business Insurable Risks

 •   Personnel (Labor)
     Ø   Health insurance provides protection against the
         high costs of individual health care.
     Ø   Disability insurance provides payments to
         employees who are unable to work for an extended
         period due to serious illness or injury.
     Ø   Life insurance pays the face amount of the
         insurance policy upon the death of the insured.




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Business Insurable Risks- Property

 Ø Insurance is purchased to protect
   business from financial loss due to
   damages to their:
         Ø Vehicles
         Ø Buildings

         Ø Equipment

         Ø Building contents, including inventory.

 l Perils    that could cause a loss
    l   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.
     Ø Worker’s Compensation Insurance
       provides protection for employees who are
       injured on the job or become ill because of
       the job.
     Ø 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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Uninsurable Risks

 l Some   risks are
   l Too expensive for businesses to insure
   l Uninsurable due to nature of risk




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Examples of Uninsurable Risks
 l   Economic conditions
      l Recessionary period in economic cycle

 l   Consumer demand
      l Service your business provided is going out of style

 l   Actions of competitors
      l Walmart opened near small retail stores taking most of
        customers
 l   Technology changes
      l Old production techniques are replaced by new technology

 l   Local factors
      l Large employer closes, employees laid off

 l   Business operations
     l   Unused tobacco fields due to tobacco lawsuits

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Insurance Vocabulary

 l Policy- contract between the insurer
   and insured
 l Premium – cost of insurance
 l Insurer – company offering policy
 l Insured – policyholder who buys a policy




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Insurance Vocabulary

 l Claim-  when policy holder needs insurer
   to pay for a financial loss
 l Co-pays- the amount the policyholder
   owes on a health insurance claim
 l Deductible - amount paid by policyholder
   before insurance pays
 l Face amount- $ value of life insurance
   policy

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Health Insurance Coverage

 •   Hospital insurance
     Ø Classified as medical insurance.
     Ø Covers for most or all of the charges during
       a stay in the hospital.
 •   Surgical Insurance
     Ø   Covers all or part of the surgeon’s fees for
         an operation.



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Health Insurance Coverage

 •   Regular medical insurance
     Ø Covers fees for nonsurgical care given in
       the doctor’s office, the patient’s home, or a
       hospital.
     • Major medical insurance
     Ø 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
     Ø Combines the features of hospital, surgical,
       regular, and major medical insurance.
     Ø Most common group health insurance policy




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HEALTH INSURANCE PROVIDERS

 •   Managed Care Plans
     Ø   Health Maintenance Organization (HMO)
          Ø   Consists of a staffed medical clinic to serve members.
          Ø   Objective-preventive care
          Ø   Members are entitled to a wide range of prepaid health care
              services, including hospitalization.
     •   Preferred Provider Organization (PPO)
          Ø   Provides a group of physicians, a clinic, or a hospital that
              contract with an insurance company.
          Ø   Providers agree to charge a set fee for services.
          Ø   Members are encouraged but not required to use the PPO
              services.


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Health Insurance Coverage

 l Dental   Insurance
   Ø Contains deductible and coinsurance to
     reduce the cost of premiums.
   Ø Covers examinations, X rays, cleaning and
     filling.
   Ø Covers dental injuries resulting from
     accidents.
   Ø Covers part of complicated dental work such
     as crowns or bridges.

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Health Insurance Coverage

 •   Vision Care Insurance
     Ø Covers eye examinations, prescription
       lenses, frames, and contact lenses.
     Ø 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:
      Ø Group health insurance
      Ø Managed care plans
           Ø   Health Maintenance Organizations (HMO)
           Ø   Preferred Provider Organizations (PPO)
      Ø   State Government Programs




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HEALTH INSURANCE PROVIDERS

 •   Group Health Insurance
     Ø Most popular way to buy health insurance
     Ø Companies pay part or all of the premium
       for their employees




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HEALTH INSURANCE PROVIDERS

 •   State Government Assistance
       Ø Workers Compensation provides medical and
         survivor benefits for people injured, disabled, or
         killed on the job.
       Ø 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:
     Ø   Term
     Ø   Permanent




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Types of Life Insurance

 l Term   Life Insurance
   Ø Provides financial protection from losses
     resulting from a death during a definite
     period of time (term).
   Ø Least expensive form of life insurance.

   Ø Only life insurance that is purely life
     insurance without savings and investments.



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Types of Life Insurance

 l Permanent   Life Insurance
   Ø Lasts a lifetime as long as premium is paid
   Ø Builds cash value through an investment
     feature
   Ø Part of the premium paid is used for
     insurance that provides protection
   Ø The insurance company invests part of the
     premium
   Ø Examples: whole life, universal life

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Types of Life Insurance

 l Group   Life Insurance
   Ø Covers a group of people that work together
   Ø Offers term insurance

   Ø Employer offers coverage through employer

   Ø Individual is covered by their employer

 Ø 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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