BUS106 wk13 risk management - from UNDERSTANDING CANADIAN BUSINESS, 7th Canadian Edition (custom publication for Seneca) ; published by McGraw-Hill

1. Week 13, Appendix B
Risk Management

2. Agenda
Take up Quiz B
Risk Management
exercises

3. Next Class
Chapters 1-11
Prepare answers Appendix B
to review
questions as A+
posted on A+
My.Seneca A+ A+ A+
A+

4. Learning Objectives
Discuss the
environmental
Explain the four
changes that
ways of
have made risk
managing risk
management
more important
Distinguish
between Explain the rule
insurable and of indemnity
uninsurable risk

5. Learning Objectives
Explain why businesses
Discuss the various
must carry workers’
types of insurance that
compensation
businesses may buy
insurance
Tell others why
businesses cannot
manage environmental
damage on their own

6. Risk: The chance of loss, the degree of probability of loss, and the
amount of possible loss.

7. Change and Risk
Weather, terrorism, H1N1, US economy…

8. Speculative Risk: Chance of either profit or loss

9. Pure Risk: The threat of loss with no change for profit
Fire, accident or loss
Reduce the risk
Options
Avoid the risk
Self-insure
against the risk
Buy insurance
against the risk
Image source: http://www.flickr.com/photos/edward-vielmetti/

10. Reducing Risk – internal controls and loss-prevention programs
Fire drills
Health education
Safety inspections
Equipment
maintenance
Accident prevention
programs

11. Reducing Risk – internal controls and loss-prevention programs
Security systems
Water sprinklers/smoke
detectors
Safety devices
Product recalls
Seat belts; ear plugs

12. Avoiding Risk – don’t accept hazardous jobs; outsource risky
functions
Shipping
Vaccines
Hazardous job sites
Working in companies that do
“risky things”

13. Self-Insuring – setting aside money to cover routine claims and
buying only “catastrophe” policies to cover big losses
Most appropriate when a firm has
widely distributed facilities.
Many similar organizations (like
colleges) self-insure as a group
Firms where a major fire or
earthquake could destroy the
entire operation, usually turn to
insurance to cover the risk.

14. Covering Financial Risk through Insurance – organizations spend
10% of GDP on insurance premiums!

15. Uninsurable Risks – a risk that no insurance company will cover
Market risks (price change, style
change, new products that make
your products obsolete)
Political risks (losses from war or
government restrictions on trade)
Personal risks (job loss)
Operation risks (strikes or inefficient
machinery)

16. See Figure B.1 Public Insurance
Type of Insurance What it Does
Canadian Public Health
Care
Employment Insurance
Old Age Security / Canada
Pension Plan
Canada Deposit Insurance
Corporation (CDIC)
Provincial Auto Insurance
(MAN, SASK, BC)

17. Insurable Risks – a risk that the typical insurance company will
cover
Guidelines:
• Policyholder must have
insurable interest – must be
the one at risk to suffer a
loss (i.e. can’t buy fire
insurance on your
neighbour’s house)
• Loss should be measurable
• Chance of loss should be
measurable
• Loss should be accidental
• Risk should be dispersed;
spread among different
geographical areas
• Insurance company can set
standards for accepting this
risk

18. Insurance Policies – a written contract between the insured and the
insurance company that promises to pay for all of part of a loss
Premium – fee charged by an
insurance company for an
insurance policy
Law of Large Numbers – if a
large number of people or
organizations are exposed to
the same risk, a predictable
number of losses will occur
during a given period of time

19. Rule of Indemnity – an insured person or organization cannot
collect more than the actual loss from an insurable risk
cannot gain
from risk
management can only
minimize losses

20. Types of Insurance Companies
Mutual insurance
Stock insurance company
company
• owned by stockholders; • owned by policyholders -
just like any investor- non-profit organization –
owned company excess funds go to
policyholders in the form
of dividends or premium
reductions

21. Health Insurance
Universal health care (see
Figure B.1)
Dental
Extended health care
Survivor’s benefits (death
benefits or pension)
Worldwide travel benefits
Income continuance for
long-term or short-term
disability
Pensions – monthly income
for a retired employee

22. Disability Insurance
Replaces part of your
income (50-70%) if you
become disabled -
unable to work
Waiting period before
you are eligible
Recommended because
the chances of
becoming disabled by
disease or accident
when young are much
higher than the chance
of dying
Premiums vary
according to age,
occupation, and income

23. Workplace Safety and Insurance
Provincial workplace safety and
insurance boards guarantee
payment of wages, medical care,
and rehabilitation services (eg.
retraining) for employers who
are injured on the job
Insurance also provides benefits
to survivors of workers who die
as a result of work-related
injuries
Cost to insure depends on
company safety record and types
of hazards faced by workers

24. Liability Insurance
Professional Product
• covers people who are • covers liability arising
found liable for out of products sold
professional negligence
Personal Premises
• covers liability of any • covers claims resulting
individual through a from an accident
negligent act either at occurring either at a
work or home place of work or
personal residence

25. See Figure B.2 – Types of Insurance

26. Key Employee Insurance
Loss of key employee
is a significant risk for
businesses
Cover executives with
term insurance

27. Insurance Coverage for Home-Based Businesses
Home insurance might
not fully cover home-
based business
equipment (eg. may be a
max of $2,500)
Can add a “rider” or
endorsement to
homeowner’s insurance
to increase coverage
If clients visit or you
receive deliveries, might
need home-office
insurance
Best to check with an
insurance agent
Image source: http://www.flickr.com/photos/rintakumpu/

28. Risk of Damaging the Environment
Nuclear power plant
explosions like
Chernobyl
Acid rain due to coal-
fired power plants
Global warming