____________________________________ Risk Management and Insurance: Insurance for Businesses

Risks Businesses Face 1. Events related to the property of the business 2. Events related to personnel (employees) 3. Events related to customers and others

Business Property Risks Inventory can spoil, be stolen, or go obsolete Machinery can break or become less efficient Buildings can be damaged or destroyed Equipment & items of high value can be stolen Land may become contaminated Patents may be infringed upon

Risks Related to Employees Violation of government regulations Misbehavior Theft (pilfering) Loss of key employees

Risks Related to Customers Customer injuries suffered while on business property Injury or damage caused by the use of the business’s products Product liability: payments for injury or damage that occurs during the use of the business’s products Risk of nonpayment by customers who bought goods or services on credit Offering credit will increase your sales, but… Some customers will not pay their bills as promised…resulting in write- offs

Strategic or Market Risks Focused on the wrong target market Incorrectly estimated demand (…way too optimistic) Priced the product/service incorrectly Failed to study/understand customer needs Unaware of technological changes in manufacturing or innovations in service delivery Ignored competitor actions that impact demand, pricing, marketing strategy or new product/service development

Economic and Financial Risks Changes in the economy (Inflation, recession, unemployment, etc.) Changes in supply and demand Changes in the level of competition Interest rate changes, which affect the cost of capital for a growing company Foreign exchange rates when the company is doing business globally The availability of credit Product liability and warranty claims Cash flow/liquidity problems Loss of revenues

Operational Risks A poor business plan Unfavorable lease arrangements Poor supply chain controls and disruptions Ineffective quality assurance program Information system data loss (viruses and corruption) Dependence on independent contractors Poor security and inventory control (theft) Employee incompetence

Natural Disaster Risks Fire Flood/water damage Tornados and earthquakes Terrorism and war Loss of facilities (building) Power surges Loss of utilities (water and electricity)

Strategies to Mediate the Risk Risk control Preventive approaches AVOIDANCE Eliminate the activity, thus eliminate the risk REDUCTION Change the activity to reduce the probability of loss/risk Risk sharing Insurance Outsourcing/Independent Contractors/Suppliers Risk communication Educating employees, customers, etc about the risks

Methods to Manage the Risk Risk Financing Making funds available to cover losses that cannot be managed by risk control Risk Transfer (…get insurance) Buying insurance or making contractual agreements with others to transfer risk Risk Retention (…going naked?) Choosing—whether consciously or unconsciously, voluntarily or involuntarily—to manage risk internally Self-Insurance (…establish a reserve) Designating part of a firm’s earnings as a cushion against possible future losses

Basic Principles of a Sound Insurance Program Identify your insurable business risks Workers’ compensation and automobile liability insurance are required by law. Limit coverage to major potential losses Avoid overspending insurance resources. Relate premiums to probability of loss Insure most improbable but critical losses first

Different Types of Insurance Personal Insurance Health Insurance Life Insurance Commercial Insurance International Insurance Reinsurance Specialty Insurance

Business Owner’s Policy A business version of a homeowner’s policy, designed to meet the property and liability insurance needs of small business owners Named-peril approach An approach that identifies the specific perils covered All-risk approach An approach that defines the perils covered by stating that all direct damages to property are covered except those caused by perils specifically excluded

Worker’s Compensation Provides no-fault benefits to workers injured on the job Types of benefits payable Medical Disability Rehabilitation Death

Worker’s Compensation WC coverage is mandated by law for businesses with one or more employees. Severe sanctions are imposed for failure to obtain insurance or approval to self-insure along with tort liability exposure. Employers must post notices of employee’s right to reject WC, keep rejection forms available for employees, or face the risk of lawsuit by employee (exception to exclusive remedy rule).

Worker’s Compensation 17 Grocery Stores – Ready Mix Concrete – Veterinarians – Newspaper Publisher – Metal Casting & Forging – Healthcare – Electronics Mfg – Television Network Sports – Cuts, Burns Vehicle Accidents Animal Bites Machine Operations Silica Manual Material Handling Chemicals Falls from Heights What are some of the sources of Workers Compensation claims?

Auto Insurance Protects the owner against losses arising out of the use of an automobile in business. Types of coverage include: Business Auto Garage Trucking

Property Insurance Protects against the perils like: Fire Theft Vandalism Wind Covers: Buildings Contents / Stock Business Income

Liability Protects the owner of a business for suits or claims for negligence of: Premises Products Produced Services Provided

Commercial Insurance 21 Insuring Businesses: – Small Market – Middle Market – National Market Size Complexity of Risk and Coverage Handling Expenses

Commercial Insurance Middle Market: Single or Multiple Locations Auto Fleet Typically < 100 units Limited Flexibility of program structure Formal and informal controls for Risk Exposures

Commercial Insurance National Markets: Many Locations Auto Fleets Typically > 100 units Sophisticated and Formal Controls for Risk Exposures Significant Flexibility in Program Structure – Share Risk Financial Transactions – Long Term

Functions of an Insurance Product Claims – Handles Claims and Pays the Losses Loss Control – Identifies and Controls Risk Actuarial – Predicts and Estimates Risk Underwriting – Accepts and Prices Risk

Underwriting Analyzes a customer’s business risk Decides whether to insure the risk Decides coverages to offer Decide appropriate structure Forecasts costs / Price transferred risk