Essential Standard 5.00 Understand business credit and risk management. 1

Objective 5.02 Understand risk management and insurance. 2

Topics Types of risk Ways to manage risks Business insurance Uninsurable risks 3

Types of Risk 4

What is risk? What is risk management? Different types of risk: o Economic and non-economic o Pure risk and speculative o Controllable risk and uncontrollable o Insurable risk and uninsurable 5

Types of Risk continued Economic o Results in financial loss. o 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. o Example: Fred’s Diner incurred a loss due to a fire. 6

Types of Risk continued Non-economic o May result in embarrassment or inconvenience without financial impact. o Example: Customers becoming frustrated after waiting in a check line for over 15 minutes then asked to move to another one. Pure o Threat of a loss without an opportunity for gain. o Example: Frost damages to a strawberry patch. 7

Types of Risk continued Speculative Risk o Offers the chance of gain or loss.  Example: Mary opened a shoe store that she operated for only six months. Controllable Risk o Occurs when conditions can be controlled to lessen the chance of harm.  Example: Sears installed centralized customer service stations in order to increase convenience. 8

Types of Risk continued Uncontrollable Risk o Cannot be controlled or reduced by actions.  Example: Riding along on a crowded highway with other drivers that are speeding. Insurable Risk o Meets criteria of an insurance company for coverage.  Example: An artist purchased insurance to cover his collection. 9

Types of Risk continued Uninsurable risk The possible amount of loss is unpredictable.  Example: A competitor of Staples, an office supply store, moved right across the street. 10

Ways businesses may manage risks 11

Ways to Manage Risks Avoid Transfer Insure Assume 12

Ways to Handle Risks Avoid o Declining to engage in particular activities.  Example: A book company decline an order to produce 6000 books in one day. Transfer o Allowing someone else to assume the risk.  Example: A book company has a contract for a trucking company to transport its books. 13

Ways to Handle Risks continued Insure o Purchasing insurance to cover risk.  Example: General Electric sells insurance to customers to cover their appliances.  Assume o Finishing an activity and accepting full responsibility  Example: Mary runs a coffee shop and offers a variety of services. 14

Business insurance 15

Business Insurable Risks What is insurance? Personnel o Health insurance provides protection against the high costs of individual health care. o Disability insurance provides payments to employees who are unable to work for an extended period due to serious illness or injury. o Life insurance pays the amount of the insurance policy upon the death of the insured. 16

Business Insurable Risks continued Property o Property insurance is purchased to protect business from financial loss due unsuspectingly damages to their buildings, equipment, and building contents, including inventory. Business Operations o Coverage as a result of accidents, injuries, and property damage. 17

Types of Uninsurable Risks Economic conditions Consumer demand Competitors' actions Technology changes Local factors Business operations 18

Health insurance coverage 19

Health Insurance Coverage Hospital insurance o Classified as medical insurance. o Covers for most or all of the charges during a stay in the hospital. Surgical Insurance o Covers all or part of the surgeon’s fees for an operation. 20

Health Insurance Coverage continued Regular medical insurance o Covers fees for nonsurgical care given in the doctor’s office, the patient’s home, or a hospital. Major medical insurance o Covers cost of extended and specialized care out of the hospital such as medicine and special nursing care. 21

Health Insurance Coverage continued Comprehensive Medical Policy Combines the features of hospital, surgical, regular, and major medical insurance. 22

Health Insurance Coverage continued Dental Insurance o Contains deductible and coinsurance to reduce the cost of premiums. o Covers examinations, X rays, cleaning and filling. o Covers dental injuries resulting from accidents. o Covers part or all of complicated dental work such as crowns or bridges. 23

Health Insurance Coverage continued Vision Care Insurance o Cover eye examinations, prescription lenses, frames, and contact lenses. o Some plans cover the cost of laser eye surgery that eliminates the need for glasses. 24

HEALTH INSURANCE PROVIDERS Health insurance may be obtained through employer related groups: o Group health insurance o Managed care plans  Health Maintenance Organizations (HMO)  Preferred Provider Organizations (PPO) o State Government Assistance 25

HEALTH INSURANCE PROVIDERS Group Health Insurance o Most popular way to buy health insurance. o Companies pay part or all of the premium for their employees. 26

HEALTH INSURANCE PROVIDERS Managed Care Plans o Health Maintenance Organization (HMO)  Consists of a staffed medical clinic to serve members.  Members are entitled to a wide range of prepaid health care services, including hospitalization. o 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. 27

HEALTH INSURANCE PROVIDERS State Government Assistance Workers Compensation that provides medical and survivor benefits for people injured, disabled, or killed on the job. 28