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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