Objective 5.02 Understand risk management and insurance. 1.

Objective 5.02

Understand risk management and insurance.

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Types of Risk

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Types of Risk

• What is risk?• The possibility of incurring a loss.

• What is risk management?• It is 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

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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.

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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.

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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.

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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.

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Types of Risk

• Unpredictable amount of loss Example: A competitor of Staples, an office

supply store, moved right across the street.

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Ways to handle risks

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Ways to Handle Risks

Avoid Transfer Insure Assume

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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.

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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 and accepting full

responsibility.

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Business Insurance

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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.

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Business Insurable Risks

• Property Insurance is purchased to protect business

from 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.

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Types of Uninsurable Risks

Economic ConditionsConsumer DemandAction of CompetitorsTechnology ChangesLocal FactorsBusiness Operations

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Health Insurance Coverage

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Health Insurance Coverage

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

a stay in the hospital.

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

an operation.

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Health Insurance Coverage

• Regular medical insurance Covers fees for nonsurgical care given in

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

• Major medical insurance 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

• Comprehensive Medical Policy Combines the features of hospital, surgical,

regular, and major medical insurance.

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Health Insurance Coverage

Dental Insurance Contains deductible and coinsurance to

reduce the cost of premiums. Covers examinations, X rays, cleaning and

filling. Covers dental injuries resulting from

accidents. Covers part or all of complicated dental

work such as crowns or bridges.

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Health Insurance Coverage

• Vision Care Insurance Cover eye examinations, prescription

lenses, frames, and contact lenses. 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. They include:

Group health insurance Managed care plans

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

State Government Programs

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HEALTH INSURANCE PROVIDERS

• Group Health Insurance Most popular way to buy health insurance. Companies pay part or all of the premium

for their employees.

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HEALTH INSURANCE PROVIDERS

• Managed Care Plans 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.

• 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: provides

medical and survivor benefits for people injured, disabled, or killed on the job.

Medicare: Provides health coverage for most people over age 65 and some disabled persons, provides medical and hospital insurance

Medicaid: Covers certain individuals who need public assistance

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Life Insurance

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Life Insurance Principles

• Life insurance protects survivors against financial loss associated with death.

• Basic types: Term Permanent Variable Universal

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Types of Life Insurance

Term Life Insurance Provides financial protection from losses

resulting from a death during a definite period or term.

Least expensive form of life insurance. Only life insurance that is purely life

insurance without savings and investments.

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Types of Life Insurance

Permanent (Whole) Life Insurance Has cash value and an investment feature. Part of the premium paid is used for

insurance that provides protection. The insurance company invests part of the

premium.

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Types of Life Insurance

Variable Life Insurance: Provides death benefits and savings, but allows the policyholder to determine how to invest the cash value

Universal Life Insurance: Divides the premium three ways: death benefits, insurance company expenses, and investments or savings that earn a high interest rate

Types of Life Insurance

Group Life Insurance Covers a group of people. Offers term rather than permanent

insurance. Individual is covered by their employer

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Life Insurance Terms

Dependent: A person that relies on another for financial support

Proceeds: Money paid to the policyholder’s survivors

Beneficiary: The person named in the policy who receives the proceeds

Renewable Policy: A policy which the policyholder may renew for one or more terms without proving he is a good risk

Life Insurance Terms

Cash Value: The amount of money received if a policyholder decides to give up the policy before his death

Face Value: The amount of insurance coverage originally purchased which will be paid upon the policyholder’s death

Factors which Determine the Cost of Life Insurance

Type of Life Insurance Purchased: whole, term, universal

Age of Insured: how old the person is purchasing the insurance

Health of Insured: current state of health, plus any previous illnesses or major injuries

Factors which Determine the Cost of Life Insurance

Gender of Insured: the gender of the person purchasing insurance

Face Amount of the Policy: amount of coverage being purchased, such as $100,000

Company Selected to Provide Insurance: the company the insurance policy is being purchased through, such as: All State, State Farm, Geico

Comparison of Different Types of Life Insurance

In Relation to Type of Coverage Provided

In Relation to the CostTobacco user vs. non-tobacco userHealth screening vs. no health screening.