Objective 5 02
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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

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Objective 5 02

Objective 5.02

Understand risk management and insurance.

YouTube - Risk is our Business


Topics

Topics

  • 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.

      Examples:

      • 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.

        Examples:

        • 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

    Example:

    • 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

    Example:

    • 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

    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 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


    Health insurance providers2

    HEALTH INSURANCE PROVIDERS

    • Group Health Insurance

      • Most popular way to buy health insurance

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


    Health insurance providers3

    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


    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


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