Many retail stores use mirrors, video cameras, and other devices to prevent shoplifting. Water sprinklers and smoke detectors minimize fire loss. Most industrial machines have safety devices to protect workers' fingers, eyes, and so on.
MANAGING RISKAllie Cramer, Tyler Leithead, Antonio Archie & Luis Herera BONUS CHAPTER C
GOAL 1: UNDERSTANDING BUSINESS RISKS Luis Herera
UNDERSTANDING BUSINESS RISKS• Hackers and viruses are an increasing threat to computers, and identity theft is a commonplace.• Theft and fraud can destroy a business.• Such reports are so much a part of the news that we tend to accept these events as part as everyday life. But with the losses of property, equipment, transportation, and other resources mean a great deal to the people and origination injured by them.• In some states, insurance against such loss is not available or is too expensive for high-risk businesses.• Executives in Quality Digest found more than 90% were building or want to build enterprise risk management (ERM) into their organizations.
HOW RAPID CHANGE AFFECTS RISKMANAGEMENT:• Risk goes beyond the obvious dangers of fire, theft, or accident. It is inherent in every decision a manager makes, and the prudent company assess its exposure in all of them.• Risk managers are expanding their expertise into human resources, IT, security, legal, site construction, and more.• Change is occurring so fast that it is difficult to identify new risks until they are upon us.
RISK:• Is the chance of loss, the degree of probability of loss, and the amount of possible loss. There are two kinds of risk: • Speculative Risk- a chance for either profit or loss • Pure Risk- the threat of loss with no chance of profit
THE TYPE OF RISK THAT MOST CONCERNS BUSINESSPEOPLE IS PURERISK. IT THREATENS THE VERY EXISTENCE OF SOME FIRMS. ONCETHEY IDENTIFY PURE RISKS, FIRMS HAVE SEVERAL OPTIONS:• Reduce the risk.• Avoid the risk.• Self-insure against the risk.• Buy insurance against the risk.
REDUCING RISK:• A firm can reduce risk by establishing loss-prevention programs such as fire drills, health education, safety inspections, equipment maintenance, accident prevention programs, and so on.• Employees as well as managers can reduce risk. The beginning of an effective risk management strategy is a good loss-prevention program. However, high insurance rates have forced some firms to go beyond merely preventing risks to avoiding them, in extreme cases by going out of business.
AVOIDING RISK:• We cant avoid every risk. There is always the chance of fire, theft, accident, or injury. But some companies are avoiding risk by not accepting hazardous jobs and by outsourcing shipping and other functions.• Many companies have cut back on their investments to avoid the risk of financial losses, especially since the market fall of 2008–2009.
SELF- INSURANCE:-Is the practice of setting aside money to cover routine claims and buying only“catastrophe” insurance policies to cover big losses. • One of the riskier self-insurance strategies is for a company to “go bare,” paying claims from its operating budget instead of from a special fund. The whole firm could go bankrupt over one claim if the damages are high enough. • A less risky alternative is to form group-insurance pools that share similar risks.
BUYING INSURANCE TO COVER RISK:• Insurance is the armor individuals, businesses, and nonprofit organizations use to protect themselves from various financial risks. Together they spend about 10 percent of gross domestic product (GDP) on insurance premiums. The federal government provides some insurance protection, but individuals and businesses must cover most on their own.
TYPES OF RISKS:• Uninsurable Risk- is one that no insurance company will cover. • Market Risk • Personal Risk • Political Risk • Operational Risk• Insurable Risk- is one the typical insurance company will cover, using the following guidelines: • The policyholder must have an insurable interest (The possibility of the policy holder to suffer loss) which means the policyholder is the one at risk to suffer a loss. You cannot buy fire insurance on your neighbors house and collect if it burns down.
INSURABLE RISK (CONT.)• The loss must be measurable• The Chance of loss must be measurable• The loss must be accidental• The insurance companys risk should be dispersed; that is, spread among different geographical areas so a flood or other natural disaster in one area will not bankrupt the insurance company.• The insurance company must be able to set standards for accepting the risk.
UNDERSTANDING INSURANCE POLICIES:• Insurance Policy- Written contract between the insured, whether an individual or organization, and an insurance company that promises to pay for all or part of the loss by the insured.• Premium- is the fee the insurance company charges, the cost of the policy to the insured.• Claim- Statement of loss that the insured sends to the insurance company to request payment.• Insurance companies are designed to make a profit like all of the private businesses. • Gather data to determine the extent of the various risks.
LAW OF LARGE NUMBERS & PREMIUMS• The law of large numbers is what makes it possible for insurance companies to accept risk. • Law of large numbers- Principle that if a large number of people are exposed to the same risk, a predictable number of losses will occur during a given period of time. • When an insurance company predicts the number of losses that are likely to occur, it can determine the appropriate premiums for each policy it issues against that loss.• The premium will be high enough to cover expected losses and also earn a profit for the firm and its stockholders.• Many insurance companies today are charging high premiums for the costs they anticipate from the increasing numbers of court cases and high damage awards.
RULE OF INDEMNITY:• A rule saying that an insured person or organization cannot collect more than the actual loss from an insurable risk.• You also cannot buy two insurance policies as well as two insurance companies and collect from both for the same loss.• You cannot gain from risk management, you can only minimize losses.
TYPES OF INSURANCE COMPANIES:• Two types: • Stock insurance company- type of insurance company owned by stockholders. • Mutual insurance company- type of insurance company owned by its policyholders • Nonprofit organization, and any excess funds (over losses, expenses, and growth costs), go to the policyholders/ investors in the form of dividends or premium reductions.
GOAL 4: INSURANCE COVERAGE FOR VARIOUS KINDS OF RISK Tyler Leithead
THERE ARE MANY TYPES OF INSURANCE TO COVERVARIOUS LOSES:• Property• Liability• Insurance• Health insurance• Life insurance
HEALTH INSURANCE:• Businesses may offer some sort of health insurance to choose from for their employees. everything from dental, hospital, eye care, and prescription drugs may be included.• Often employees may choose between options from health care providers: EX-Blue cross/Blue shield.
PREFERRED PROVIDER ORGANIZATIONS• These are health care organizations that allow members to choose their own physicians.
HEALTH SAVINGS ACCOUNT• These are tax-deferred savings accounts linked to low-cost, high deductible health insurance policies.• This allows the employer to take the money from high cost health insurance and put it into a health savings account and employees can use it when needed and the leftover money can then be kept by the employee at the end of the year.
DISABILITY INSURANCE• This replaces part of your income. Up to 50-70% if you become disabled or unable to work.• You have to be disabled for at least 60 days to start collecting.• The premiums for disability insurance vary according to age, occupation, and income.
WORKERS COMPENSATION• There are laws that require all employers have this insurance for their employees.• This is insurance that guarantees payments of wages, medical care, and rehabilitation services for employees who are injured on the job.• This also pays benefits to the survivors of those who dies as a result of work related injuries.• The cost of this insurance is based on the company’s safety records, how many employees are on payroll, and the types of hazards that the workers face.
LIABILITY INSURANCE• This covers people who are liable for professional negligence. For example: If a lawyer gives bad advice and the client loses money the client may sue the lawyer for an amount that is equal to that lost.• Liability insurance will then cover that and pay the lawyers loss.
LIFE INSURANCE FOR BUSINESSES• Life insurance is insurance that ensures the people who are left behind from a deceased loved one so they can keep there business going. Or for the immediate family of the deceased.• Entrepreneurs often buy life insurance that will pay partners and others what they need to keep the business going.
INSURANCE COVERAGE FOR HOME-BASEDBUSINESSES:• Homeowner’s policies usually don’t have adequate protection for a home- based business• Have limits, for more coverage, they may need to add an endorsement or ride to the homeowner’s policy.• A typical homeowners policy usually only covers damages up to $2,500 on the premises of the home-based business, and $250.00 off the premises.• In addition your homeowners policy won’t typically cover liability arising from your home business, for example if a delivery person slips and falls when delivering a package.
THE RISK OF DAMAGING THE ENVIRONMENT• Risk management goes beyond the protection of individuals, business, non- profit organizations from known risks.• The evaluation of worldwide risks with many unknowns, such as climate change.• Also means prioritizing these risks so that international funds can be spent where they can do the most good.• These risks are the concerns of businesses and governments throughout the world, with the help of the international scientific community
WORKS CITED• Identity Theft. Cheap Insurance. 5 Apr. 2011. DWI Lawyer. 06 Dec. 2011 <http://www.google.com/imgres?q=theft>.• Roberts, Armstrong H. 1950s Man Mailman Tripping Falling In Front Of A Suburban Brick House Accident. 10 June 1953. Corbis Images. 2002. Corbis Corporation. 06 Dec. 2011 <http://www.corbisimages.com/stock-photo/rights-managed/42- 20041922/1950s-man-mailman-tripping-falling-in-front>.