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Objective 5.02. Understand risk management and insurance. YouTube - Risk is our Business. Topics. Types of risk Ways to handle risks Business Insurance Uninsurable risks. Risks & Risk Management. What is risk? The possibility of incurring a loss. . What is risk management?

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Objective 5 02

Objective 5.02

Understand risk management and insurance.

YouTube - Risk is our Business


  • Types of risk

  • Ways to handle risks

  • Business Insurance

  • Uninsurable risks

Risks risk management
Risks & Risk Management

  • What is risk?

  • The possibility of incurring a loss.

  • What is risk management?

  • Itis a systematic process of managing risk to achieve set objectives.

Types of risk
Types of Risk

  • Different types of risk:

    • Economic and non-economic

    • Pure risk and speculative

    • Controllable risk and uncontrollable

    • Insurable risk and uninsurable

Types of risk economic
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.

  • Examples of economic risks
    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.

    Types of risk1
    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

  • Types of risk2
    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.

    Types of risk3
    Types of Risk

    • Speculative Risk

    • Offers the chance of gain or loss.

      • Example: Mary opened a shoe store that operated for only six months.

    Types of risk4
    Types of Risk

    Controllable Risk

    • Occurs when conditions can be controlled to lessen the chance of harm.


      • Sears installed centralized customer service stations in order to increase convenience.

      • Will travels by motorcycle to school, wearing a helmet and leather jacket.

    Types of risk5
    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.

    Ways to handle risks
    Ways to Handle Risks

    • Transfer the risk

      • Allowing someone else to assume the risk.


        • A book company has a contract for a trucking company to transport its books.

        • Joan rides the bus to work.

    Insurable risks
    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

    Unpredictable risk
    Unpredictable Risk

    Unpredictable amount of loss


    • A competitor of Staples, an office supply store, moved right across the street.

    Ways to handle risks1
    Ways to Handle Risks

    • Avoid

    • Transfer

    • Insure

    • Assume

    Ways to handle risks2
    Ways to Handle Risks

    • Avoid the risk

      • Declining to engage in particular activities.

        • Example:

        • A book company declines an order to produce 6000 books in one day.

        • Goggle, Inc. declined expanding their business into a new city.

        • Joan does not drive a vehicle for fear of having an accident.

    Ways to handle risks3
    Ways to Handle Risks

    • Transfer - Insure the risk

      • Purchasing insurance to cover risk.

        • Example: General Electric sells insurance 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.

    Ways to handle risks4
    Ways to Handle Risks


    • Mary runs a coffee shop and offers a variety of services.

    • A & G Inc ‘s company vehicle is paid for and dropped the property damage (comprehensive & collision) insurance.

    • Tom signed for a $10,000 loan for new equipment.

    Business insurable risks
    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)

    Business insurable risks1
    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.

    Business insurable risks property
    Business Insurable Risks- Property

    • Insurance is purchased to protect businessfrom 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

  • Business insurable risks business operations
    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.

    Worker s comp
    Worker’s Comp

    Most worker’s comp

    claims require drug

    testing before

    payment is made.

    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.

    Uninsurable risks
    Uninsurable Risks

    • Some risks are

      • Too expensive for businesses to insure

      • Uninsurable due to nature of risk

    Examples of uninsurable risks
    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

    Insurance vocabulary
    Insurance Vocabulary

    • Policy - contract between the insurer and insured

    • Premium – cost of insurance

    • Insurer – company offering policy

    • Insured – policyholder who buys a policy

    Insurance vocabulary1
    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

    Health insurance coverage
    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.

    Health insurance coverage1
    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.

    Health insurance coverage2
    Health Insurance Coverage

    • Comprehensive Medical Policy

      • Combines the features of hospital, surgical, regular, and major medical insurance.

      • Most common group health insurance policy

    Health insurance coverage3
    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.

    Health insurance coverage4
    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.

    Health insurance providers1

    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

    Health insurance providers2

    • Group Health Insurance

      • Most popular way to buy health insurance

      • Companies pay part or all of the premium for their employees

    Health insurance providers3

    • 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

    Life insurance principles
    Life Insurance Principles

    • Life insurance protects survivors against financial loss associated with death.

    • Two basic types:

      • Term

      • Permanent

    Types of life insurance
    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.

    Types of life insurance1
    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

    Types of life insurance2
    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