Chapter 16 – Risk Management, Insurance, and Crime Prevention
16-1
CHAPTER
Risk Management, Insurance,
and Crime Prevention
CHAPTER CONTENTS
Learning Objectives 16.2
Chapter Overview 16.2
16
Chapter 16 – Risk Management, Insurance, and Crime Prevention
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LEARNING OBJECTIVES
After studying the material in this chapter, the student will be able to:
1. Define risk and explain some ways of coping with it.
2. Explain what insurance is and show how it can be used to minimize loss due to risk.
CHAPTER OVERVIEW
Chapter 16 covers risk management (There are always risks in life and business, but hopefully
many can be managed, minimalized, or prevented.). Chapter 16 covers Insurance (One of the necessary
things to prepare for possible risks or emergencies.) Third, Chapter 16 covers crime prevention (An in-
BRIEF CHAPTER OUTLINE
I. RISK AND ITS MANAGEMENT
A. Types of Risk
II. USING INSURANCE TO MINIMIZE LOSS DUE TO RISK
A. Types of Insurance Coverage
B. Guides to Choosing an Insurer
III. CRIME PREVENTION TO PROTECT PEOPLE AND ASSETS
A. Armed Robbery
B. Theft
IV. SAFEGUARDING EMPLOYEES WITH PREVENTIVE MEASURES
Chapter 16 – Risk Management, Insurance, and Crime Prevention
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CHAPTER OUTLINE AND TEACHING NOTES
CHAPTER OPENING PROFILE:
Dr. Jeffrey F. Van Petten: A Unique Entrepreneur
I. RISK AND ITS MANAGEMENT
Learning Objective 1.
Define risk and explain some ways of coping with it.
A. Small Business Risks
1. Small business losses of money and
2. Losses also come from street im-
2. RISK MANAGEMENT is the process
of conserving earning power and as-
B. Types of Risk
1. PURE RISK is the uncertainty that
some unpredictable event will result
in a loss.
a. Pure risk exists when there is the
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2. SPECULATIVE RISK is the uncer–
tainty that a voluntarily undertaken
production or inventory.)
C. Ways of Coping with Risk
1. RISK AVOIDANCE is refusing to un-
dertake an activity where the risk
seems too costly.
REAL WORLD EXAMPLE 16.2
A New York bank tried to have small depositors pay a fee
to see a teller. The customers rebelled.
2. RISK PREVENTION (LOSS CON-
TROL) is using various methods to
reduce the possibility of a loss occur-
ring.
a. The main control technique is
REAL WORLD EXAMPLE
New Orleans Plaza Mall moved its security station to a
glass-enclosed room in the center of the mall, so passersby
could see the officers monitoring closed-circuit TV. However,
even that security could not prevent the risk of weather. Hurri-
cane Katrina destroyed New Orleans Plaza Mall on August
29, 2005. It was not rebuilt.
3. RISK TRANSFER is shifting a risk to
someone outside your company.
a. The best known form of risk
Chapter 16 – Risk Management, Insurance, and Crime Prevention
D. Insurance for Your Business
1. The sharing of risks among a large
pool of people is the basic definition
of the word insurance.
5. Most businesses need some type of
liability insurance to deal with legal
risks.
6. RISK ASSUMPTION, or SELF-IN-
II. USING INSURANCE TO MINIMIZE LOSS
DUE TO RISK
Learning Objective 2.
Explain what insurance is and show how it can be used to
minimize loss due to risk.
A. The principal value of insurance lies in its
reduction of your risks from doing busi-
ness.
1. The business trades a potentially
Chapter 16 – Risk Management, Insurance, and Crime Prevention
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B. Types of Insurance Coverage
REAL WORLD EXAMPLE 16.4
The fire at a small formal wear company destroyed $1
million worth of clothing. The damage was compounded by
the loss of customer records.
1. Basic fire insurance policies insure
only losses from fire and lightning
and those due to temporary removal
of goods because of fire, and should
be supplemented by:
a. An extended-coverage endorse-
ment that insures against loss
c. COINSURANCE is having the
business buy insurance equal to
a specific percentage of property
value.
2. Casualty insurance consists of auto-
mobile insurance plus burglary, theft,
Chapter 16 – Risk Management, Insurance, and Crime Prevention
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3. Professional liability (malpractice) in-
surance protects the small business
4. PRODUCT/SERVICE LIABILITY IN-
SURANCE protects a business from
losses resulting from the use of its
product.
a. Companies are subject to com-
mon and statutory laws govern-
c. Another problem is what to do
about liability when sponsoring
athletic teams or some poten-
tially dangerous activities.
5. Workers’ compensation policies pro-
vide for medical care, lump sums for
death, and income for disabled work-
ers, or their dependents.
a. Reducing workers’ compensation
costs:
(1) Involve employees in safety
Chapter 16 – Risk Management, Insurance, and Crime Prevention
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6. Group health and life insurance
a. Life insurance provides protec-
tion for an employee’s estate
when he or she dies while still in
the income-producing years.
ACA Act.
d. The Affordable Care Act (ACA)
passed in 2010 by
President Barack Obama, re-
quires all health insurance com-
panies to cover applicants with
Chapter 16 – Risk Management, Insurance, and Crime Prevention
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7. Business Insurance describes the
use of life and disability insurance to
solve financial issues of businesses
and business owners.
a. Business insurance consists of:
(1) Protection of owner and de-
pendents against loss from
(3) Economic loss to a business
when a key employee dies.
8. Key person insurance insures the life
(or lives) of important employees.
9. Insurers issue fidelity and surety
bonds to guarantee employees and
Chapter 16 – Risk Management, Insurance, and Crime Prevention
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that involve handling of company
funds.
C. Guides to Choosing an Insurer
Learning Objective 3.
Discuss some guides to be used in choosing an insurer.
1. Consider the financial characteristics
of the insurer, the insurer’s flexibility
in meeting your needs, and the ser-
vices rendered by the agent.
2. Independent insurance agents repre-
sent more than one company.
3. Some Red Flags to Look For:
a. An agent who delays giving an-
swers.
e. An adjuster who says it will cost
you more to process the claim
than the amount of your deducti-
ble.
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3. Financial characteristics and flexibility
of insurer
a. The major types of insurers are
b. In comparing the different types,
you should consider:
(1) Financial stability and safety.
c. It is difficult to make valid com-
parisons of insurance coverage
and its costs.
d. According to Amy Danise for In-
sure.com, there are five ways
you can reduce the costs of in-
surance.
(1) Buy policies from the same
insurer.
Chapter 16 – Risk Management, Insurance, and Crime Prevention
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b. Choose an agent who is willing
and able to:
(1) Devote enough time to your
problems to justify the com-
mission.
c. According to Alfred Corina, New
York Life, when choosing
your agent, two criteria come
into play:
III. CRIME PREVENTION TO PROTECT PEO-
PLE AND ASSETS
Learning Objective 4.
Show how crime prevention can reduce risk and protect
people and assets.
A. Small business owners need to practice
crime prevention to reduce risks and pro-
tect their assets.
Chapter 16 – Risk Management, Insurance, and Crime Prevention
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1. By being aware of the potential dan-
2. It is impossible to have a security pro-
gram that will prevent all criminal
acts, only minimize their occurrence
and severity.
3. Work at “Keeping the peace.”
a. Adopt a zero-tolerance policy.
4. America’s Research Group, Inc. re-
vealed that more than 42 percent of
5. In busy times like Christmas, it might
6. Identifying areas particularly suscep-
tible to crime
a. Crimes appear to fall into pat-
terns, by type and by location.
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B. Armed Robbery
Learning Objective 5.
Discuss some techniques for safeguarding against theft.
1. In recent years, the number of armed
robberies has increased significantly,
with the Bureau of Labor stating over
b. Locations with easy access and
relatively secure escape routes
are most vulnerable.
2. Modifying store layout
a. Location of the cash register and
high visibility inside and from out-
side are important.
Chapter 16 – Risk Management, Insurance, and Crime Prevention
REAL WORLD EXAMPLE 16.6
One convenience food chain took all items out of the win-
dows that obstructed the view into the store. The average an-
nual robbery rate dropped markedly.
3. Securing entrances
a. Windows and rear doors should
4. Using security dogs
a. Security dogs are trained to be
5. Controlling the handling of cash
a. Do not be predictable. Make
daily cash deposits and vary the
6. Redesigning the surroundings
a. Well-lighted parking lots help de-
ter robbers.