Objective 5.02

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

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

3. 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.

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

5. 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.

6. 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.

7. 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

8. 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.

9. Types of Risk • Speculative Risk • Offers the chance of gain or loss. • Example: Mary opened a shoe store that operated for only six months.

10. 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.

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. 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.

13. 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

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

15. Ways to Handle Risks • Avoid • Transfer • Insure • Assume

16. 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.

17. 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.

18. 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.

19. 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)

20. 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.

21. 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

22. 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.

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

24. 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.

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

26. 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

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

28. 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

29. 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.

30. 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.

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

32. 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.

33. 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.

34. 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

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

36. 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

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

38. 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.

39. 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

40. 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