1. Understand risk management and insurance.
Objective 5.02
Understand risk management and insurance.

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 Examples:
May result in embarrassment or inconvenience without financial impact.
Examples:
Requesting customers to move to another check-out lane.
Putting customers on hold.

7. Types of Risk
Pure Risk
Threat of a loss without an opportunity for gain.
Examples:
Frost damages a farmer’s crop.
Driving 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.

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. 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.

11. 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

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

13. Ways to Handle Risks
Avoid
Transfer
Insure
Assume

14. Ways to Handle Risks Avoid the risk
Declining to engage in particular activities.
A book company declines an order to produce 6000 books in one day.
Goggle, Inc. declined expanding their business into a new city.
Mike does not drive a vehicle for fear of having an accident.

15. Ways to Handle Risks Transfer the risk Insure the risk
Allowing someone else to assume the risk.
A book company has a contract for a trucking company to transport its books.
Insure the risk
Purchasing insurance to cover risk.
General Electric sells insurance to customers to cover their appliances.
Kyle insures his auto for property damage since he still owes money to the bank.

16. Ways to Handle Risks Assume the risk
Finishing an activity and accepting full responsibility.
A & G Inc ‘s company vehicle is paid for and dropped the property damage (comprehensive & collision) insurance.

17. 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)

18. 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.

19. 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

20. Business Insurable Risks- Business Operations
Protection for business operations that result in accidents, injuries, and property damage.
Worker’s Compensation Insurance provides protection for employees who are injured on the job or become ill because of the job.
Liability insurance covers damage to property of others by employees at work.

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

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

23. 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

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

25. 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

26. 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.

27. 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.

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

29. 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.

30. 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.

31. 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.

32. 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

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

34. HEALTH INSURANCE PROVIDERS
State Government Assistance
Workers Compensation provides medical and survivor benefits for people injured, disabled, or killed on the job.
Paid for by employer but required by state Department of Labor

35. Life Insurance Principles
Life insurance protects survivors against financial loss associated with death.
Two basic types:
Term
Permanent

36. 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 purely life insurance without savings and investments.

37. Types of Life Insurance
Permanent Life Insurance
Lasts a lifetime as long as premium is paid
Builds cash value through an investment feature
Part of the premium paid is used for insurance that provides protection
The insurance company invests part of the premium
Examples: whole life, universal life

38. Types of Life Insurance
Group Life Insurance
Covers a group of people that work together
Offers term insurance
Employer offers coverage through employer
Individual is covered by their employer
Ex: Builders Inc. offers employees group term life insurance with a policy face amount of up to 4 times their salary