Objective 5.02 Understand risk management and insurance. 1 YouTube - Risk is our Business

Topics Types of risk Ways to handle risks Business Insurance Uninsurable risks 2

Risks & Risk Management What is risk? The possibility of incurring a loss. What is risk management? It is a systematic process of managing risk to achieve set objectives. 3

Types of Risk Different types of risk:  Economic and non-economic  Pure risk and speculative  Controllable risk and uncontrollable  Insurable risk and uninsurable 4

Types of Risk -Economic  Results in financial loss.  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.  Example: Fred’s Diner incurred a loss due to a fire. 5

Examples of Economic Risks  Personal risk – Alex went snowboarding at Snowshoe and broke his leg. The hospital bill was $1400.  Property risk – Harding invested in stock market and lost money when his stock’s value dropped.  Liability risk – A customer slipped on spilled water in the store aisle before an employee cleaned the spill. 6

Types of Risk Non-economic Risk  May result in embarrassment or inconvenience without financial impact.  Examples:  Requesting customers to move to another check-out lane.  Inviting a guy to the Sadie Hawkins Dance 7

Types of Risk Pure Risk  Threat of a loss without an opportunity for gain  Examples:  Frost damages your strawberry patch.  Mona drives to work every day. 8

Types of Risk Speculative Risk  Offers the chance of gain or loss.  Example: Mary opened a shoe store that operated for only six months. Mary opened the store because she hoped to make a profit. 9

Types of Risk Controllable Risk  Occurs when conditions can be controlled to lessen the chance of harm. Examples:  Sears installed centralized customer service stations in order to increase convenience.  Will travels by motorcycle to school, wearing a helmet and leather jacket. 10

Ways to Handle Risks Transfer the risk  Allowing someone else to assume the risk Examples:  A book company has a contract for a trucking company to transport its books.  Joan rides the bus to work.  Howard Painting pays worker’s compensation insurance premium for a policy to cover employees. 11

Types of Risk Uncontrollable Risk  Cannot be controlled or reduced by your actions.  Example: Riding along a highway with other speeding automobiles. You can control your driving but not the other drivers. 12

Insurable Risks Insurable Risk  Meets criteria of an insurance company for coverage.  Examples:  An artist purchased property insurance to cover his collection.  Owner purchased liability insurance for the business.  Automobile insurance is purchased to cover liability and property damage risks. 13

Unpredictable Risk Unpredictable amount of loss Example:  A competitor of Staples, an office supply store, moved right across the street. 14

Ways to Handle Risks  Options  Avoid  Transfer  Reduce  Assume 15

Ways to Handle Risks-AVOID Avoid the risk  Declining to engage in particular activities.  Example:  A book company declines an order to produce 6000 books in one day.  Gobble, Inc. declined expanding their business into a new city due to recession  Joan does not drive a vehicle for fear of having an accident.  Don’t ask out the person you’d like to date 16

Ways to Handle Risks-TRANSFER Transfer - Insure the risk  Purchasing insurance to cover risk.  Warranties Examples:  K& K Enterprises purchases worker’s compensation insurance for all employees  General Electric sells extended warranties to customers to cover their appliances  A book company has a life insurance policy on its key employees  Kyle insures his auto for property damage since he still owes money to the bank  Note: bank will require comprehensive & collision as long as you owe them money on property

Ways to Handle Risks- REDUCE Examples:  Buckle children into approved car seats  Reduces risk of injury in a vehicle collision  Smoke detectors in homes  Reduces risk of loss by fire or smoke damage  Security dogs in parking lot facility  Reduces risk of intruders after business hours

Ways to Handle Risks-ASSUME Assume the risk  Deciding to participate in a particular activity  Examples:  Competing with other sporting goods businesses  Expanding business into a neighboring town  Driving a vehicle without auto liability insurance  Note: illegal in most states  Getting married  Applying for a job 19

Examples What risks are there? How might the risk be handled? 1. Mary runs a coffee shop and offers a variety of services. 2. A & G Inc ‘s company vehicle is paid for and dropped the property damage (comprehensive & collision) insurance. 3. Tom signed for a $10,000 loan for new equipment. 20

Business Insurable Risks  Businesses share risks with other businesses by purchasing insurance  Insure personnel (human resource)  Insure property (assets of business)  Insure business operations (future income of the business) 21

Business Insurable Risks Personnel (Labor)  Health insurance -provides protection against the high costs of individual health care  Disability insurance -provides payments to employees who are unable to work for an extended period due to serious illness or injury  Life insurance - pays the face amount of the insurance policy upon the death of the insured  Worker’s Compensation Insurance - pays for death or injury incurred on the job 22

Business Insurable Risks- Property  Insurance is purchased to protect business from financial loss due to damages to their:  Vehicles  Buildings  Equipment  Building contents, including inventory. Perils that could cause a loss Fire, theft, vandalism, hail, smoke, ice, water, windstorm 23

Business Insurable Risks- Business Operations  Worker’s Compensation Insurance provides protection for employees who are injured on the job or become ill because of the job.  Employee falls off ladder and breaks leg.  Liability insurance covers damage to property of others by employees at work  Employees using ladder, it falls and breaks window at house 24 Protection for business operations that result in accidents, injuries, and property damage.

Worker’s Comp Most worker’s comp claims require drug testing before payment is made. 25

HEALTH INSURANCE PROVIDERS Managed Care Plans  Health Maintenance Organization (HMO)  Consists of a staffed medical clinic to serve members.  Objective-preventive care  Members are entitled to a wide range of prepaid health care services, including hospitalization. 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. 26

Uninsurable Risks Some risks are Too expensive for businesses to insure Uninsurable due to nature of risk 27

Examples of Uninsurable Risks Economic conditions Recessionary period in economic cycle Consumer demand Service your business provided is going out of style Actions of competitors Walmart opened near small retail stores taking most of customers Technology changes Old production techniques are replaced by new technology Local factors Large employer closes, employees laid off Business operations Unused tobacco fields due to tobacco lawsuits 28

Insurance Vocabulary Policy - contract between the insurer and insured Premium – cost of insurance Insurer – company offering policy Insured – policyholder who buys a policy 29

Insurance Vocabulary Claim- when policy holder needs insurer to pay for a financial loss Co-pays- the amount the policyholder owes on a health insurance claim Deductible - amount paid by policyholder before insurance pays Face amount - $ value of life insurance policy to be paid 30

Health Insurance Coverage Hospital insurance  Classified as medical insurance.  Covers for most or all of the charges during a stay in the hospital. Surgical Insurance  Covers all or part of the surgeon’s fees for an operation. 31

Health Insurance Coverage Regular medical insurance  Covers fees for nonsurgical care given in the doctor’s office, the patient’s home, or a hospital. Major medical insurance  Covers cost of extended and specialized care out of the hospital such as medicine and special nursing care. 32

Health Insurance Coverage Comprehensive Medical Policy  Combines the features of hospital, surgical, regular, and major medical insurance.  Most common group health insurance policy 33

Health Insurance Coverage Dental Insurance  Contains deductible and coinsurance to reduce the cost of premiums.  Covers examinations, X rays, cleaning and filling.  Covers dental injuries resulting from accidents.  Covers part of complicated dental work such as crowns or bridges. 34

Health Insurance Coverage Vision Care Insurance  Covers eye examinations, prescription lenses, frames, and contact lenses.  Some plans cover the cost of laser eye surgery that eliminates the need for glasses. 35

HEALTH INSURANCE PROVIDERS Health insurance may be obtained through employer related groups. Options include:  Group health insurance  Managed care plans  Health Maintenance Organizations (HMO)  Preferred Provider Organizations (PPO)  State Government Programs 36

HEALTH INSURANCE PROVIDERS Group Health Insurance  Most popular way to buy health insurance  Companies pay part or all of the premium for their employees 37

HEALTH INSURANCE PROVIDERS State Government Assistance  Workers Compensation  Paid for by employer but required by state Department of Labor 38

Life Insurance Principles Life insurance protects survivors against financial loss associated with death A building block in financial plan pyramid Two basic types:  Term  Permanent  Whole life  Universal life 39

Types of Life Insurance Term Life Insurance  Provides financial protection from losses resulting from a death during a definite period of time (term)  Least expensive form of life insurance  Only life insurance that is pure life insurance (without savings and investment features) 40

Term Life Example Molly has a limited budget but needs life insurance to protect her young daughter. Molly buys a $100,000 term policy that costs $35.00 a month. The policy will last for only 20 years. 1. Molly dies during the 20 year “term”. Her daughter (beneficiary) receives $100, At the end of the 20 years, the policy will expire. If Molly dies after the 20 years, no money is paid out to beneficiary. 41

Types of Life Insurance Permanent Life Insurance  Lasts a lifetime as long as premium is paid  Builds cash value through an investment feature * review from savings & investment unit  Part of the premium paid is used for insurance that provides protection  Insurance company invests part of the premium to build cash value 42

Permanent Insurance Examples: whole life, universal life Miles buys a whole life policy with face amount of $50,000 for $43 a month. Whenever Miles dies, his beneficiaries receive $50,000. If Miles dies in 10 days, 10 years, or 50 years, they will still receive $50,000 + current cash value. If Miles lives to be 100, he has an asset worth $50,000 face amount plus the cash value. 43

Types of Life Insurance Group Life Insurance  Employer offers coverage through employer  Covers a “group” of people that work together  Offers term insurance  Individual is covered by their employer  Usually term insurance 44

Types of Life Insurance Group Life Example Quality Builders Inc. offers employees group term life insurance with a policy face amount of up to 4 times their salary 45