978-0078023163 Chapter C Part 2

Bonus C – Managing Risk

C-16

PPT C-11

What Risks Are Insurable?

WHAT RISKS are INSURABLE?

C-11

LO C-2

• Insurable Risk — A risk that the typical insurance

company will cover, using the following guidelines:

1) The policyholder must have an insurable interest.

2) The loss must be measurable.

3) The chance of loss must be measureable.

4) The loss must be accidental.

5) The insurance company’s risk should be dispersed

among different areas.

6) The insurance company can set standards for accepting

risks.

PPT C-12

What Risks Are Insurable?

PUBLIC INSURANCE

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LO C-2

test

prep

PPT C-13

Test Prep

TEST PREP

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• Why are companies more aware now of the need

to manage risk?

• What is the difference between pure risk and

speculative risk?

• What are the four major options for handling risk?

• What are some examples of uninsurable risk?

PPT C-14

Insurance Policies

INSURANCE POLICIES

C-14

LO C-3

• Insurance Policy — A written contract between the

insured and an insurance company that promises to

pay for all or part of the loss by the insured.

• Premium — The fee the insurance company

charges, the cost of the policy to the insured.

• Claim — A statement of loss that the insured sends to

the insurance company to request payment.

Bonus C – Managing Risk

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to the same risk, a predictable number of losses

will occur during a given period of time.

a. These figures are used to determine the ap-

propriate premiums to assume the risk.

b. Many insurance companies charge high

premiums anticipating costs of more court

cases and higher damage awards.

B. RULE OF INDEMNITY

1. The RULE OF INDEMNITY says that an injured

person or organization cannot collect more than

the actual loss from an insurable risk.

2. One cannot gain from risk management; one

can only MINIMIZE LOSES.

C. TYPES OF INSURANCE COMPANIES

1. A STOCK INSURANCE COMPANY is a type of

insurance company owned by stockholders.

2. A MUTUAL INSURANCE COMPANY is a type

of insurance company owned by its policyhold-

ers.

a. A mutual insurance company does not earn

profits for its owners.

b. It is a nonprofit organization, and any excess

funds go to the policyholder in the form of

dividends or premium reduction.

 learning objective 4

Discuss the various types of insurance businesses can buy to manage risk.

IV. INSURANCE COVERAGE FOR VARIOUS

Bonus C – Managing Risk

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PPT C-15

Basics of Insurance Policies

• 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.

BASICS of

INSURANCE POLICIES

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LO C-3

• Rule of Indemnity —

An insured person or

organization can

’

t collect

more than the actual loss

from an insurable risk.

PPT C-16

Types of Insurance Companies

• Stock Insurance Company — Owned by

stockholders, just like any other investor-owned

company.

TYPES of

INSURANCE COMPANIES

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LO C-3

• Mutual Insurance

Company — An

organization owned by its

policyholders.

PPT C-17

Stock and Mutual Insurance

Companies

STOCK and MUTUAL

INSURANCE COMPANIES

Stock Insurance

Companies

Hartford Life

Metropolitan Life

Prudential Life

Mutual Insurance

Companies

Mass Mutual

New York Life

Northwestern Mutual

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LO C-3

test

prep

PPT C-18

Test Prep

TEST PREP

C-18

• What is the law of large numbers?

• What is the rule of indemnity?

Bonus C – Managing Risk

C-19

KINDS OF RISK

A. There are many types of insurance that cover vari-

ous losses.

1. PROPERTY LOSSES result from fires, acci-

dents, theft, or other perils.

2. LIABILITY LOSSES result from property dam-

age or injuries suffered by others for which the

policyholder is held responsible.

B. HEALTH INSURANCE

1. The U.S. is going through major changes in

health insurance as the government is now more

involved.

2. Recent legislation, such as the AFFORDABLE

CARE ACT has the government much more in-

volved in healthcare.

3. Organizations can offer their employees an ar-

ray of health care benefits to choose from.

C. HEALTH SAVINGS ACCOUNTS (HSAs) (formerly

called MEDICAL SAVINGS ACCOUNTS) are

tax-deferred accounts linked to low-cost, high-

deductible health insurance policies.

a. Employees put part of their salary into an

HSA, which is used to cover major medical

expenses.

b. The use of HSAs may lower overall health

costs.

c. If you don’t spend the money in your account

in any one year, you can save the money for

Bonus C – Managing Risk

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PPT C-19

Health Insurance Changes

HEALTH INSURANCE CHANGES

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LO C-4

• The Affordable Care Act has the government much

more involved in the health insurance process.

• We are likely to see many variations of health

coverage in the future.

TEXT FIGURE C.2

Private Insurance

This text figure shows some types of insurance coverage

not provided by private insurance companies.

Bonus C – Managing Risk

C-21

future medical expenses.

D. DISABILITY INSURANCE

1. Disability insurance replaces part of your income

if you become disabled and unable to work.

2. Experts recommend this type of insurance: the

chances of becoming disabled are much higher

than the chance of dying.

E. WORKERS’ COMPENSATION

1. WORKERS’ COMPENSATION INSURANCE

guarantees payment of wages, medical care,

and rehabilitation services (e.g., retraining) for

employees who are injured on the job, regard-

less of fault.

2. Employers in all 50 states are required to pro-

vide this insurance.

3. The cost of insurance varies by the company’s

safety record, its payroll, and the types of haz-

ards faced by workers.

F. LIABILITY INSURANCE

1. PROFESSIONAL LIABILITY INSURANCE, also

called MALPRACTICE INSURANCE, covers

people who are found liable for professional

negligence.

2. Many professionals, not just doctors, buy this

type of insurance in the face of increasing law-

suits.

3. PRODUCT LIABILITY INSURANCE provides

coverage against liability arising out of products

Bonus C – Managing Risk

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PPT C-20

Other Types of Insurance

OTHER TYPES of INSURANCE

C-20

LO C-4

• Disability insurance replaces

part of your income if you

become disabled and cannot

work.

• Worker’s compensation

insurance guarantees

payment of wages, medical

care and rehabilitation for

employees injured on the

job.

Bonus C – Managing Risk

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sold.

G. LIFE INSURANCE FOR BUSINESSES

1. Bonus Chapter D, “Managing Personal Fi-

nance,” discusses life insurance.

2. All the concepts discussed there apply to busi-

nesses also.

3. The best coverage for most individuals is TERM

INSURANCE.

H. INSURANCE COVERAGE FOR HOME-BASED

BUSINESSES

1. Homeowner’s policies usually don’t provide ad-

equate protection for a home-based business.

2. For more coverage, you may need an EN-

DORSEMENT (sometimes called a RIDER) to

your homeowner’s insurance.

3. You may also need HOME OFFICE INSUR-

ANCE if you have visitors in your house.

4. For businesses that are more elaborate a

BUSINESS OWNER POLICY may be needed.

I. THE RISK OF DAMAGING THE ENVIRONMENT

1. RISK MANAGEMENT now goes far beyond the

protection of individuals, businesses, and non-

profit organizations from known risks.

2. Organizations must prioritize these risks so

funds can be spent were they can do the most

good.

3. No insurance company can protect humanity

Bonus C – Managing Risk

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PPT C-21

Getting the Most out of Life Insur-

ance

GETTING the MOST out of

LIFE INSURANCE

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Source: Entrepreneur, www.entrepreneur.com, accessed November 2014 .

LO C-4

1. Quit smoking, lose weight

and go to the gym!

2. Figure out how much

insurance you need.

3. Pick a good insurance

company.

4. Find a good financial

planner.

PPT C-22

Liability Insurance

LIABILITY INSURANCE

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PhotoCredit:PaulWilson

LO C-4

• Professional liability insurance

covers people found liable for

professional negligence; also

known as malpractice

insurance.

• Product liability insurance

covers liability arising out of

products sold.

PPT C-23

Home-Based Businesses

HOME-BASED BUSINESSES

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LO C-4

• Homeowners’ policies

usually do not provide

protection for home-based

businesses.

• For more coverage, you

may need to add a rider to

your homeowner’s policy.

• Cyber risk insurance can

help a business in case of

hacking.

PPT C-24

Home Matters

HOME MATTERS

What You Need to Know About Home Insurance

C-24

Source: Money, www.money.com. accessed November 2014.

LO C-4

1. Not all policies cover

home-based businesses.

2. Don’t buy too much

coverage.

3. Small claims can add up.

4. The home’s history

matters.

lecture enhancer C-4

RECONSIDERING FLOOD

INSURANCE

As Gulf residents have learned, most insurance covers wind

damage, but not flood damage. A federal program exists to

provide low-cost flood insurance, but few vulnerable home-

owners use it. (See the complete lecture enhancer on page

C.38 of this manual.)

Bonus C – Managing Risk

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from such risks.

J. PROTECTION FROM CYBER ATTACKS

1. Cyber risk insurance can help a company pre-

pare for the worst.

2. Insurance would cover the company if employ-

ees filed suit against the company for personal

information leaked.

V. SUMMARY

Bonus C – Managing Risk

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test

prep

PPT C-25

Test Prep

TEST PREP

C-25

• Why should someone buy disability insurance?

• How many different kinds of private insurance can

you name?

Bonus B – Managing Risk

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PowerPoint slide notes

PPT C-1

Chapter Title

McGraw-Hill/Irwin

Managing Risk

BONUS CHAPTER C

PPT C-2

Learning Objectives

LEARNING OBJECTIVES

C-2

1. Identify the environmental changes that have

made risk management important.

2. Explain the four ways of managing risk, and

distinguish between insurable and uninsurable

risk.

3. Define insurance policies, and explain the law of

large numbers and the rule of indemnity.

4. Discuss the various types of insurance

businesses can buy to manage risk.

PPT C-3

Dan Amos

DAN AMOS

Aﬂac

C-3

• Amos has been CEO of Aﬂac

for over 25 years.

• The company has decided to

only operate in the U.S. and

Japan covering expenses that

normal health insurance does

not.

• Aﬂac is one of the 100 best

U.S. companies to work for

and Amos claims much of the

credit goes to the duck!

Bonus B – Managing Risk

C-28

PPT C-4

Name That Company

NAME that COMPANY

C-4

This type of insurance company is a nonprofit

organization owned by its policyholders. Any

excess funds (over losses, expenses, and

growth costs) go to the policy-holders in the

form of dividends or premium reductions.

Name that company!

Company: A mutual insurance company

PPT C-5

What’s Enterprise Risk Management?

WHAT’S ENTERPRISE RISK

MANAGEMENT?

C-5

LO C-1

• Goals of enterprise risk management (ERM):

1) Defining which risks the program will manage.

2) What risk management processes, technologies, and

investments will be required.

3) How risk management efforts will be coordinated across

the firm.

The risk management function of large corporations plays an

important role in the organization’s success.

PPT C-6

What’s Risk?

WHAT’S RISK?

C-6

LO C-1

• Risk — The chance of loss,

the degree of probability of

loss, and the amount of

possible loss.

• Speculative Risk — A

chance of either profit or loss.

• Pure Risk — The threat of

loss with no chance for profit.