Essential Standard 5.00

Understand business credit and risk management.

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Objective 5.02

Understand risk management and insurance.

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Topics

• Types of risk• Ways to manage risks• Business insurance• Uninsurable risks

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Types of Risk

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Types of Risk

• What is risk?• What is risk management?• Different types of risk:

o Economic and non-economico Pure risk and speculativeo Controllable risk and uncontrollableo Insurable risk and uninsurable

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Types of Risk continued

• Economico Results in financial loss.o Three categories of economic loss:

Personal risk – Result in personal lossesProperty 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.

o Example: Fred’s Diner incurred a loss due to a fire.

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Types of Risk continued

• Non-economico May result in embarrassment or inconvenience without

financial impact.o Example: Customers becoming frustrated after waiting in a

check line for over 15 minutes then asked to move to another one.

• Pureo Threat of a loss without an opportunity for gain. o Example: Frost damages to a strawberry patch.

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Types of Risk continued

• Speculative Risko Offers the chance of gain or loss.

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

• Controllable Risko Occurs when conditions can be controlled to

lessen the chance of harm.Example: Sears installed centralized customer service

stations in order to increase convenience.

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Types of Risk continued

• Uncontrollable Risko Cannot be controlled or reduced by actions.

Example: Riding along on a crowded highway with other drivers that are speeding.

• Insurable RiskoMeets criteria of an insurance company for

coverage.Example: An artist purchased insurance to cover his

collection.

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Types of Risk continued

Uninsurable risk The possible amount of loss is unpredictable.

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

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Ways businesses may manage risks

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Ways to Manage Risks

• Avoid• Transfer• Insure• Assume

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Ways to Handle Risks

• Avoido Declining to engage in particular activities.

Example: A book company decline an order to produce 6000 books in one day.

• Transfero Allowing someone else to assume the risk.

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

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Ways to Handle Risks continued

• Insureo Purchasing insurance to cover risk.

Example: General Electric sells insurance to customers to cover their appliances.

Assumeo Finishing an activity and accepting full

responsibilityExample: Mary runs a coffee shop and offers a variety

of services.

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Business insurance

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Business Insurable Risks

• What is insurance?• Personnel

oHealth insurance provides protection against the high costs of individual health care.

oDisability insurance provides payments to employees who are unable to work for an extended period due to serious illness or injury.

o Life insurance pays the amount of the insurance policy upon the death of the insured.

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Business Insurable Risks continued

• Propertyo Property insurance is purchased to protect

business from financial loss due unsuspectingly damages to their buildings, equipment, and building contents, including inventory.

• Business Operationso Coverage as a result of accidents, injuries, and

property damage.

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Types of Uninsurable Risks

• Economic conditions• Consumer demand• Competitors' actions• Technology changes• Local factors• Business operations

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Health insurance coverage

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Health Insurance Coverage

• Hospital insurance o Classified as medical insurance.o Covers for most or all of the charges during a stay

in the hospital.

• Surgical Insuranceo Covers all or part of the surgeon’s fees for an

operation.

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Health Insurance Coverage continued

• Regular medical insuranceo Covers fees for nonsurgical care given in the

doctor’s office, the patient’s home, or a hospital.

• Major medical insurance o Covers cost of extended and specialized care out of the

hospital such as medicine and special nursing care.

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Health Insurance Coverage continued

Comprehensive Medical PolicyCombines the features of hospital, surgical, regular, and major medical insurance.

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Health Insurance Coverage continued

Dental Insuranceo Contains deductible and coinsurance to reduce

the cost of premiums.o Covers examinations, X rays, cleaning and filling.o Covers dental injuries resulting from accidents.o Covers part or all of complicated dental work such

as crowns or bridges.

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Health Insurance Coverage continued

Vision Care Insuranceo Cover eye examinations, prescription lenses,

frames, and contact lenses.o Some plans cover the cost of laser eye surgery

that eliminates the need for glasses.

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HEALTH INSURANCE PROVIDERS

Health insurance may be obtained through employer related groups:

oGroup health insuranceoManaged care plans

Health Maintenance Organizations (HMO)Preferred Provider Organizations (PPO)

o State Government Assistance

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HEALTH INSURANCE PROVIDERS

Group Health InsuranceoMost popular way to buy health insurance.o Companies pay part or all of the premium for their

employees.

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HEALTH INSURANCE PROVIDERS

Managed Care Planso Health Maintenance Organization (HMO)

Consists of a staffed medical clinic to serve members. Members are entitled to a wide range of prepaid health care services,

including hospitalization.o 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.

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HEALTH INSURANCE PROVIDERS

State Government AssistanceWorkers Compensation that provides medical and survivor benefits for people injured, disabled, or killed on the job.

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