Objective 5.02

1. Objective 5.02 Understand risk management and insurance.

2. Types of Risk

3. Types of Risk • What is risk? • The possibility of incurring a loss. • What is risk management? • Itis a systematic process of managing risk to achieve set objectives. • 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. Types of Risk • Non-economic • May result in embarrassment or inconvenience without financial impact. • Example: Requesting for customers to move to another check-out lane due to a computer problem. • Pure • Threat of a loss without an opportunity for gain. • Example: Frost damages a strawberry patch.

6. Types of Risk • Speculative Risk • Offers the chance of gain or loss. • Example: Mary opened a shoe store that operated for only six months. • Controllable Risk • Occurs when conditions can be controlled to lessen the chance of harm. • Example: Lumber company automates much of their sawing process to remove the risk of accidents.

7. Types of Risk • Uncontrollable Risk • Cannot be controlled or reduced by your actions. • Example: Riding along a highway with other speeding automobiles. • Insurable Risk • Meets criteria of an insurance company for coverage. • Example: An artist purchased insurance to cover his collection.

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

9. Ways to handle risks

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

11. Ways to Handle Risks • Avoid the risk • Declining to engage in particular activities. • Example: A book company decline an order to produce 6000 books in one day. • Transfer the risk • Allowing someone else to assume the risk. • Example: A book company has a contract for a trucking company to transport its books.

12. Ways to Handle Risks • Insure the risk • Purchasing insurance to cover risk. • Example: General Electric sells insurance to customers to cover their appliances. • Assume risk • Finishing an activity andaccepting full responsibility.

13. Business Insurance

14. Business Insurable Risks • Personnel • 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 amount of the insurance policy upon the death of the insured.

15. Business Insurable Risks • Property • Insurance is purchased to protect businessfrom financial loss due unsuspectingly damages to their buildings, equipment, and building contents, including inventory. • Business Operations • Coverage as a result of accidents, injuries, and property damage.

16. Types of Uninsurable Risks • Economic Conditions • Consumer Demand • Action of Competitors • Technology Changes • Local Factors • Business Operations