Chapter 23 Risk and Insurance In the Spotlight: Whaler’s Catch Restaurant Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-1

Learning Objectives: Chapter 23 1. Define risk and explain the nature of risk. 2. Explain how risk management can be used in coping with business risks. 3. Describe the risks associated with different types of assets, both physical and human. 4. Explain the basic principles used in evaluating an insurance program and the fundamental requirements for obtaining insurance. 5. Identify the different types of insurance coverage. Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-2

The Process of Risk Management Step 1: Identify risks. Step 2: Evaluate risks. Step 3: Select methods to manage risk. Step 4: Implement the decision. Step 5: Evaluate and review. Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-3

Ways to Deal with Risk Risk Control Risk Financing Risk avoidance Risk reduction Risk transfer Risk retention Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-4

Risks Associated with Property Fire Natural disasters Burglary and business swindles Shoplifting Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-5

Risks Associated with Personnel Employee dishonesty Competition from former employees Loss of key executives Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-6

Risks Associated with Customers On-premises injuries Product liability Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-7

The Wheel of Misfortune On-Premise Injury Fire Natural Disasters Product Liability Burglary and Business Swindles Bad Debts Customer Risks Property Risks Personnel Risks Shoplifting Employee Dishonesty Bankruptcy Loss of Key Executives Competition from Former Employees Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-8

Basic Principles of a Sound Insurance Program 1. Identify business risks to be insured. 2. Limit coverage to major potential losses. 3. Relate premium costs to probability of loss. Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-9

Requirements for Obtaining Insurance 1. Risk must be calculable. 2. Risk must exist in large numbers. 3. Insured property must have commercial value. 4. The policyholder must have an insurable interest in the property or person insured. Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-10

Types of Insurance Commercial property coverage Surety bonds Credit insurance Commercial liability insurance Key-person insurance Disability insurance Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 23-11