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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
C-12
LO C-2
test
prep
PPT C-13
Test Prep
TEST PREP
C-13
• 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
C-17
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
C-18
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
C-15
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
C-16
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
C-17
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
C-20
PPT C-19
Health Insurance Changes
HEALTH INSURANCE CHANGES
C-19
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
C-22
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
C-23
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
C-24
PPT C-21
Getting the Most out of Life Insur-
ance
GETTING the MOST out of
LIFE INSURANCE
C-21
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
C-22
PhotoCredit:PaulWilson
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
C-23
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
C-25
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
C-26
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
C-27
PowerPoint slide notes
PPT C-1
Chapter Title
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
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.
