Risk ManagementBusiness Essentials Sherenna Vandiver

RISK

Rank in order 1-10 of your risk taking. 1 would be high risk. Something you would probably never consider doing. 10 would be low risk. Might do.

StealingTaking money from the church offering plateTaking illegal drugsShopliftingGetting a tattooCheating on a testColoring your hair hot pinkStaying out past curfewLying to your parentsDownloading a bootleg movie

Risk• A measure of the uncertainty of an investment’s rate of return; • possible losses involving income or standard of living;• the possibility of a loss from peril to people or property covered by

insurance. • Life is about risk. • Individuals face some type of risk in everything they do and every

decision they make. • In most cases, we try to minimize the impact of risk by • having insurance or other types of protection from loss. • taking steps to prevent it. • finding a way to manage our risk .

• Interestingly, our ability to tolerate risk varies from person to person. • What seems like “high risk” to one person may seem to be perfectly

acceptable behavior to someone else. • Because of differences in perception, it is sometimes difficult to

accurately label activities or behaviors as always this or that.

High Risk

•Most people would agree that running a red light is a high-risk activity.• Really pushing the limits on what is safe.• Putting yourself and others in any

situation where it is probably that someone will be harmed• Seem exciting and challenging, but also

tend to be dangerous

Risk• Risk is based on uncertainty• It involves• A loss• A catastrophe• Some other undesirable or negative outcome

• Your behavior can frequently increase or decrease the potential of those outcomes.

• 3 examples explaining potential sources of risk:• If you drink and drive, you are responsible for the choice you make

and for the risk you take.• If you happen to be in the car with a friend who runs a red light, you

are subject to risk because of your friend’s actions.• If you house gets hit by a tornado or your car gets damaged by half-

inch hail, your loss is a result of circumstances beyond your control.

Managing Risk• Risk comes from many different sources, and it is in

everything we do.• The purpose of learning to manage risk is to help you identify

and evaluate situations where you may have a loss, and then make a plan for dealing with the loss.

• Your goal is to minimize risk and your loss.• Some of the risk management tools you can use include• Avoiding it• Reducing it• Accepting it• Transferring it to someone else

Risk Management Tools

• Avoiding risk means that you choose not to act on a behavior you know is risky.• Reducing risk lowers the severity or loss or

likelihood of loss occurring.• Accepting risk of loss, or choosing to self insure,

is a viable strategy to small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. • Transferring risk is most often achieved by

buying insurance.

A Risky Behavior

A way to avoid the risk

A way to reduce the risk

A way to accept the risk

A way to transfer the risk

In the table below, write down one behavior you consider a risk. Then, identify one way to do each of the following: avoid the risk, reduce the risk, accept the risk, and transfer the risk.

Quiz1. Which one of the following statements best describes risk?

a. The potential of having a financial loss. b. The potential you will make a bad choice. c. The losses you have from negative outcomes. d. The negative results of bad choices.

2. Developing a risk management plan involves

a. buying insurance to cover all potential losses. b. identifying and evaluating all potential losses. c. finding ways to avoid losses from risky behavior. d. eliminating risk from your daily activities.

3. Buying insurance would be classified as a way to ____________ risk.

a. avoid b. minimize c. transfer d. accept

4. Which of the following statements is TRUE?

a. It is impossible to reduce your risk. b. You can reduce your risk but not eliminate it. c. Your behavior has no impact on your level of risk. d. You can control all risk factors.

INSURANCE

Important Words to Know

• Claim: A written request submitted to your insurance carrier to cover a loss.• Deductible: The dollar amount or percentage of a loss

that is not insured, as specified in an insurance policy. • Premium: The fee paid for insurance prote• Insurance is one of the most important parts of your risk

management plan. • By purchasing insurance, individuals can transfer their

personal risk to a third party — the insurance company. • Today, it is possible to insure almost anything.

How Insurance Premiums Work• Most insurance companies are not quite as exotic with their

policies. • They tend to sell insurance for things such as cars, houses, and

boats. • People like you pay premiums to insurance companies to

cover potential losses associated with their belongings. • The insurance company takes those premiums and pulls them

together in one pool of money. • Those funds are available to pay for the losses suffered by

members of the pool. • By using this process, insurance companies can charge lower

premiums and provide more services for their customers.

• Insurance premiums are based on the potential risk and potential losses they will have to pay to the group members.

• While insurance premiums sometimes seem rather high, the rates vary from person to person—depending upon personal risk factors such as age, health, personal behaviors, employment, and, yes, credit ratings.

• In return for paying the premium, you receive an insurance policy from the company explaining your rights and responsibilities when using the insurance.

• The additional amount you pay when filing a claim with the insurance company is called the deductible.

• The deductible is the term used for the amount you, the insured, are willing to pay before your insurance policy picks up the risk.

• It represents the portion of the risk you are prepared to cover from your personal savings.

• You will often hear the phrase “after you meet your deductible” to indicate the amount you must pay before the insurance policy takes effect.

• An insurance policy is simply a contract between you and the insurance company outlining what is covered, the limits of your coverage, and whatever procedures you must follow to maintain the policy and collect any payments for your losses.

• While the insurance company will pay the greatest part of your loss, generally you will also pay a small part as well—in addition to your premium.

• The additional amount you pay when filing a claim with the insurance company is called the deductible.

• The deductible is the term used for the amount you, the insured, are willing to pay before your insurance policy picks up the risk.

• It represents the portion of the risk you are prepared to cover from your personal savings.

• You will often hear the phrase “after you meet your deductible” to indicate the amount you must pay before the insurance policy takes effect.

• When making insurance choices, you should consider the following. • Is this insurance necessary? If the potential loss is large, it could

be financially devastating to you and your family. If the potential loss is small, you may have savings or other financial resources to cover it without insurance.

• How much insurance is needed? Do you want to cover the minimum loss, or do you need to cover the cost to replace whatever you may lose?

• How much will it cost? Do the benefits of purchasing the insurance outweigh the costs?

Quiz

1. The amount of money you pay before your insurance provides coverage is called a

a. premium b. copay c. deductible d. benefit

2. Payments for insurance are called

a. premiums b. copays c. deductibles d. costs

3. A written request submitted to your insurance carrier to cover a loss is called a

a. copay.b. premium.c. claim.d. deductible.

INSURANCE and RISK MANAGEMENT

““An ounce of prevention is worth a pound of An ounce of prevention is worth a pound of cure” -Benjamin Franklincure” -Benjamin Franklin

• Insurance is created when people like you and your Insurance is created when people like you and your neighbors pool their resources to protect themselves neighbors pool their resources to protect themselves from lossfrom loss

• If the risk of loss can be spread over a large enough If the risk of loss can be spread over a large enough group, the effects of the loss to any one individual can be group, the effects of the loss to any one individual can be minimizedminimized

What is Insurance?

History of Insurance Where did insurance come from?Where did insurance come from? ““The Code of Hammurabi”The Code of Hammurabi”

Created by the Babylonians around 2100 B.C. to guarantee Created by the Babylonians around 2100 B.C. to guarantee safe arrival of their goods by caravansafe arrival of their goods by caravan

What types of perils would the caravan have faced?What types of perils would the caravan have faced? Theft, Weather, BreakdownsTheft, Weather, Breakdowns

As history progressed, the need for insurance increased.As history progressed, the need for insurance increased. The Phoenicians and Greeks used insurance for their The Phoenicians and Greeks used insurance for their

seaborne commerce.seaborne commerce. The Romans were the first to use burial insurance. The Romans were the first to use burial insurance. The first Insurance Company was formed in 1688 in LondonThe first Insurance Company was formed in 1688 in London

Lloyds of LondonLloyds of London Merchants, Ship-owners, and Underwriters met at a Merchants, Ship-owners, and Underwriters met at a

coffeehouse to discuss how to protect the sea voyagescoffeehouse to discuss how to protect the sea voyages

History of InsuranceModern insurance traced back to the “Great Modern insurance traced back to the “Great Fire of London” in 1666Fire of London” in 1666

13,200 houses were destroyed13,200 houses were destroyed Societies were formed to pool money for Societies were formed to pool money for

losseslossesAlso created the need for modernizing fire Also created the need for modernizing fire

fightingfightingThe first American insurance company was The first American insurance company was

formed in Charleston, South Carolina in 1735formed in Charleston, South Carolina in 1735 Fire Insurance Companies began spreading Fire Insurance Companies began spreading

to New York City and Philadelphiato New York City and Philadelphia

History of InsuranceBenjamin FranklinBenjamin Franklin

• Founded America’s first successful insurance Founded America’s first successful insurance companycompany

• Founded the First Mutual Insurance Founded the First Mutual Insurance CompanyCompany

• Encouraged prevention by educating the Encouraged prevention by educating the public about fire hazardspublic about fire hazards

• Refused to insure wooden buildingsRefused to insure wooden buildings

• ““An ounce of prevention is worth a pound of An ounce of prevention is worth a pound of cure.”cure.”

History of InsuranceInsurance is Big Business!Insurance is Big Business!

United States Insurance Industry:United States Insurance Industry:

• Trillion dollar businessTrillion dollar business

• Employs over 2.5 million people in USEmploys over 2.5 million people in US

• As the population ages and wealth grows the industry will As the population ages and wealth grows the industry will continue to expandcontinue to expand

• Home, Auto, Life, Health are the most common forms of Home, Auto, Life, Health are the most common forms of insurance.insurance.

AUTO INSURANCE

Auto Insurance• Types of vehicle insurance include• Bodily injury liability• Property damage liability• Medical payments• Collision• Comprehensive coverage• Uninsured motorist protection• Miscellaneous coverage

• Liability insurance protects you from claims of bodily injury or property damage to others.

Auto Insurance• State law requires drivers to prove financial responsibility in

case of an accident.• Most state also require you to carry a minimum amount of

insurance.• No-fault insurance requires drivers involved in accidents to

collect damages from their own insurance companies no matter who is at fault.

• These laws vary from state to state.

Auto Insurance• The costs of insurance premiums are affected by:• Costs insurance companies pay in claims.• Amount of coverage • The deductible on a policy• Type of vehicle• The area where the vehicle will be driven• The driver’s age• Gender• Marital status• Driver’s driving record

HOME INSURANCE(PROPERTY INSURANCE)

Home Insurance• You can insure both real property (a

house, business, other type of building) and personal property(furniture, jewelry, electronics).• There are different kinds of property

insurance:• renter’s insurance, • standard fire policy, • liability, • additional living expenses, and • business insurance.

Home Insurance• There are six kinds of homeowner’s

policies for different needs:• Basic• Broad• Special• Renter’s• Comprehensive• Condominium owner’s

• All of these include protection against eleven perils, which are the most common causes of property damage or loss.

Home Insurance• The costs of property insurance premiums is affected by • The type of policy•Amount of coverage•Deductible• Location• Type of building•Preventative measures you might

take

LIFE INSURANCE

Life Insurance•Cash-value life insurance provides both protection and builds up savings.• Term life insurance, or pure protection,

provides death benefits only.• The cost of life insurance depends on the• Type of policy•Amount of coverage•Age, health, and occupation of the

insured

HEALTH INSURANCE

Health Insurance• Types of health insurance include•Major medical• Hospital expense• Surgical expense•Medical expense• Group health (get through your

employment)• Government health• Medicaid• Medicare

Health Insurance• Companies and organizations provide group medical insurance to their employees and members.• An HMO is a type of group insurance plan that has • its own facilities and doctors, • costs less than other plans, and• provides preventative health care.

• Medicare and Medicaid are government health insurance programs for • retired persons, low-income families, • people with medical needs, dependent children,

and • people receiving government assistance.