Bonus C – Managing Risk
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Bonus C – Managing Risk
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PPT C-16
Stock and Mutual Insurance
Companies
1. This slide profiles some of stock insurance compa-
nies and mutual insurance companies.
2. If time permits, have students examine some of the
differences among the stock and mutual insurance
companies listed on this slide.
PPT C-17
Progress Assessment
1. The law of large numbers means that if a large
number of people or organizations are exposed to
the same risk, a predictable number of losses will
occur during a period of time.
2. The rule of indemnity says an insured person or or-
ganization cannot collect more than the actual loss
from an insurable act.
PPT C-18
Heath Insurance Changes
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PPT C-19
Employer Health Insurance Options
PPT C-20
Other Types of Insurance
Employers in all 50 states are required to provide work-
ers’ compensation insurance.
PPT C-21
Getting the Most out of Life Insurance
The cost of life insurance increases if you smoke or are
overweight, so addressing these issues will reduce your
premiums.
Bonus C – Managing Risk
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PPT C-22
Liability Insurance
PPT C-23
Home-Based Businesses
PPT C-24
Home Matters
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PPT C-25
Progress Assessment
1. Disability insurance is important, because a young
person is more likely to become disabled than to
die.
2. The kinds of private insurance include life insur-
ance (whole and term), medical insurance (PPO and
HMO), property insurance, renter’s insurance, pro-
fessional liability insurance, disability, and work-
ers’ compensation.
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lecture
links
lecture link C-1
THE FOUR FACETS OF RISK
While many companies are doing a better job of cataloging their risks, many industry insiders
think an entirely new approach may be needed. Most businesses approach risk within a “silo structure,”
where different risks are handled by different departments. As the business grows, everyone has a good
understanding of the risks in their part of the business but not in other parts of the firm. If businesses co-
ordinated all the parts, risk could be managed more efficiently.
For many companies, risk management stops with these three facets—hazard risk, financial risk,
and operational risk. But business must also consider a fourth facet of risk—strategic risk. This is the
most dangerous type of threat businesses face. Strategic risk isn’t as easy to define or protect against as an
earthquake or the fluctuating price of oil. Strategic risk is an external bad thing that can happen to your
business model, like the collapse of your brand’s reputation or the risk of a new technology overtaking
your own. Strategic risk is not only the most dangerous type of risk, but also the most prevalent, account-
ing for 60 to 70% of a business’s risk.
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betting, or investing in both. In the 1980s, Microsoft embraced both Windows and OS/2 until one system
prevailed. In both these cases, the companies not only managed their risk, they also grew their businesses.
lecture link C-2
RISK PERCEPTION: ANALYTICAL VERSUS INTUITIVE
Washington Post writer Joel Achenbach recalls the man he encountered on the morning of Sep-
tember 11, 2001. In the hours after terrorists flew a plane into the Pentagon, Achenbach joined the hasty
evacuation near the Federal Reserve. He came across a man sitting calmly on a park bench reading a
newspaper. The man had no interest in the evacuation or even listening to the news bulletins. He told
Achenbach that he figured the danger was over and went back to his stock listings.
Feelings can also cause us to make illogical decisions. A 1993 experiment offered people a
chance to win a dollar by drawing a red jellybean from one of two bowls. One bowl had 200 beans, 7 of
them red. The other had 10 beans, only 1 red. Many people preferred the bowl with the 7 red beans, even
though they knew the odds were worse. However, they said they felt as if they had a better chance.
Another experiment highlights the emotional, intuitive element in decision making. Clinicians at
a mental hospital were more likely to release a patient from a hospital if told he had a 20% chance of be-
coming violent than if told 20 out of 100 such patients would become violent. The visual image of the
second scenario was more frightening, although the two risks were actually equivalent.
Bonus C – Managing Risk
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lecture link C-3
THE ECONOMIC IMPACT OF A CATASTROPHE
Given these circumstances, any fiscal hit taken from the earthquake would be just another drop in
a very deep bucket. So far the government allotted $12 billion for recovery in the 2011 budget and will
likely increase that amount over the coming years. And unlike the debt crisis, business leaders are at least
addressing the aftermath of the earthquake head on. A Japanese business lobby recently gave the govern-
ment its blessing to scrap plans for a corporate tax cut to ensure that recovery efforts have as much fund-
ing as possible.iii
lecture link C-4
RECONSIDERING FLOOD INSURANCE
After Hurricane Katrina devastated the Gulf Coast in 2005, shocked residents and businesspeople
called their insurance companies. Many found out—too late to do anything about it—that their losses
weren’t covered by insurance.
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The premiums average around $400 a year for $100,000 of coverage—higher in very flood-prone
areas. That’s very reasonable, considering the risks. Many mortgage lenders require it, at least for proper-
ty located within a flood-prone area. Fannie Mae, for example, requires coverage of 80% of the replace-
ment cost of the home, or the program limit of $250,000, whichever is less.
Previously, the premiums collected have kept the program self-sustaining. But according to Rob-
ert Hunter, former head of the federal flood insurance program, the 2005 hurricane season will throw the
program into deficit. According to Hunter, Hurricane Katrina is the first disaster in which flood claims
exceed those for wind, which are typically paid by private insurers or state-run risk pools.
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endnotes