RISK AND INSURANCE

RISK

• The chance of loss–Speculative Risk

–Pure Risk

Speculative Risk

• A situation that many cause loss or gain.– Investing time, equipment, money, and

human resources to produce a new product– Investing in the stock market or real estate– Spending two or four years of your life,

labor, and money to earn a college degree

Pure Risk

• A situation that can only become a loss.– Destruction of physical property by natural

disaster, riot, fire, or vandalism– Injuries suffered in an automobile accident– Court awards of damages to customers

injured while shopping at a store or to consumers harmed by a product makes

How Businesses Deal with Pure risk?

• Employ a risk manager– Recommend anything of the antirisk

actions• Risk Reduction• Transfer of Risk to a Noninsurer• Assumption of Risk by Self - Insurance• Transfer of Risk to an Insurance

Company

Risk Reduction

• Example– Using flame-retardant or fireproof building

material– Storing inventory in several warehouse at

different locations to minimize potential loss from fire or natural disasters

– Conducting safety programs that teach workers to use machinery properly

– Installing drop safes in retail stores and service stations

Transfer of Risk to a Noninsurer

• Leasing vehicles

• Leasing building

Assumption of Risk by Self - Insurance

• A special fund of cash and marketable securities used to pay for losses caused by natural disasters such as fire, flood, and earthquake

Transfer of Risk to an Insurance Company

• Based on – Law of large numbers– Law of averages

• Insurance policy– a legal contract that transfers risk from

one party to another for a fee called a premium

What Insurance Does a Company Need?

• Fire Insurance – allied lines– Business interruption insurance

• Motor Vehicle Insurance– Collision and upset– Property damage liability– Bodily injury liability– Medical payment

• Workers’ Compensation Insurance– Employ’s accident claim rate– Degree of hazard or risk inherent in the job– Size of employer’s payroll

• Public Liability Insurance

• Product Liability Insurance

• Life Insurance– Provide money to pay the deceased's debt

and funeral costs– Pay an income to survivors after the insure

d’s death– Guarantee that a certain amount of money

will be paid to the insured person some time in the future or to a beneficiary after the insures person dies

What Insurance Does a Company Need? (continued)

• Health Insurance (medical expenses)

• Disability Income Insurance

• Transportation Insurance

• Power Plant Insurance

• Credit Insurance

• Hazardous Waste Insurance

What Insurance Does a Company Need? (continued)