RISK AND INSURANCE

RISK The chance of loss –Speculative Risk –Pure Risk

Speculative Risk A situation that many cause loss or gain. –Investing time, equipment, money, and human resources to produce a new product –Investing in the stock market or real estate –Spending two or four years of your life, labor, and money to earn a college degree

Pure Risk A situation that can only become a loss. –Destruction of physical property by natural disaster, riot, fire, or vandalism –Injuries suffered in an automobile accident –Court awards of damages to customers injured while shopping at a store or to consumers harmed by a product makes

How Businesses Deal with Pure risk? Employ a risk manager –Recommend anything of the antirisk actions Risk Reduction Transfer of Risk to a Noninsurer Assumption of Risk by Self - Insurance Transfer of Risk to an Insurance Company

Risk Reduction Example –Using flame-retardant or fireproof building material –Storing inventory in several warehouse at different locations to minimize potential loss from fire or natural disasters –Conducting safety programs that teach workers to use machinery properly –Installing drop safes in retail stores and service stations

Transfer of Risk to a Noninsurer Leasing vehicles Leasing building

Assumption of Risk by Self - Insurance A special fund of cash and marketable securities used to pay for losses caused by natural disasters such as fire, flood, and earthquake

Transfer of Risk to an Insurance Company Based on –Law of large numbers –Law of averages Insurance policy –a legal contract that transfers risk from one party to another for a fee called a premium

What Insurance Does a Company Need? Fire Insurance –allied lines –Business interruption insurance Motor Vehicle Insurance –Collision and upset –Property damage liability –Bodily injury liability –Medical payment

Workers’ Compensation Insurance –Employ’s accident claim rate –Degree of hazard or risk inherent in the job –Size of employer’s payroll Public Liability Insurance Product Liability Insurance

Life Insurance –Provide money to pay the deceased's debt and funeral costs –Pay an income to survivors after the insured’s death –Guarantee that a certain amount of money will be paid to the insured person some time in the future or to a beneficiary after the insures person dies What Insurance Does a Company Need? (continued)

Health Insurance (medical expenses) Disability Income Insurance Transportation Insurance Power Plant Insurance Credit Insurance Hazardous Waste Insurance What Insurance Does a Company Need? (continued)