Chapter 12-2

Chapter 12-2

Insure Against Risk

Classification of Risk

• Business owners face many types of risk that can be classified based on the result of the risk, controllability of the risk, and insurability of the risk.

Result of the Risk

• A Pure Risk presents the chance of loss but no opportunity for gain

  (Ex:  If you have a vehicle that is used in your business, every time it goes out on the road there is the risk of an accident. If there is an accident, a loss will likely be suffered. However, if an accident is avoided, there is no opportunity for gain.)

• A Speculative Risk offers you the chance to gain as well as lose from the event or activity. (Ex. When you invest money, you have the chance to make money if the stock price rises. However, if the stock price falls, you risk the chance of losing money.)

Controllability of the Risk

• A controllable risk is one that can be reduced or possibly even avoided by actions you take

• An uncontrollable risk is one on which actions have no effect.  (Ex. Weather)

Insurability of the Risk

• A risk is an insurable risk if it is a pure risk faced by a large number of people and the amount of the loss can be predicted

•  A premium is a payment made to an insurance company to cover the cost of insurance. 

Multiple Choice

True or False? A pure risk has an opportunity for only loss while a speculative risk has an opportunity for gain as well as loss.

• True

• False

Multiple Choice

True or False? The weather is a controllable risk.

• True

• False

Multiple Choice

A payment made to an insurance company to cover the cost of insurance.

• Premium

• Risk

• Management

Uninsurable Risks

• Insurance does not cover risks that cannot be reasonably predicted or for which the financial loss to the business cannot be calculated

• These risks are tied to economic conditions, consumer demand, competitors’ actions, technology changes, local factors, and business operations.

Economic Conditions

• Changes in economic conditions can result from an:

• increase or decrease in competition

• inflation or recession

• government regulations

• When the economy takes a downward turn, a business must respond quickly by cutting production and expenses.

Consumer Demand

• Businesses produce products and services that they think consumers want to buy. 

• Business owners must research consumer needs and wants

Competitors’ Actions

• Business is competitive. 

• You must be aware of your competitors and their actions. 

• You must be ready to respond to actions by your competitors to minimize the risk to your business

Technology Changes

• Stay up to date with technology trends

• If customers view your business as outdated, you may lose customer loyalty and sales to your competition.

• Local Factors: If there is an increase in local taxes or a change in local business regulations, it can affect your business

• Business Operations: The management of a business contributes directly to its success or failure.

Multiple Choice

True or False: Uninsurable risks are those that cannot be reasonably predicted or for which the amount of potential financial loss cannot be calculated.

• True

• False

Open Ended

What are some different ways that technology has changed businesses?

Types of Insurance

• Business Insurance

• Life Insurance

• Other types of Insurance

Business Insurance

• Policies that combine protection from all major property and liability risks in one package.

• Businesses purchase a package known as a business owner’s policy (BOP), which typically includes the following:

• Property insurance,Business interruption insurance, Liability protection

Life Insrance

• Is paid in the event of the death of the insured

• It is intended to provide financial support for families should the income earner die

Other types of Insurance

• Flood protection

• Crime insurance protects against losses resulting from crime, such as robbery, computer fraud, or employee theft.

• Renters insurance covers the contents owned by the renter inside the leased space

Open Ended

What types of insurance can you purchase for your business?

Buy Insurance

• Choose an Insurance Agent: An agent can be independent and represent many different insurance companies or work for a single insurance company. To get the best price, contact a few agents and compare prices and policies among insurer

• Determine the Coverage You Need: Start by making a list of the property you own. Include equipment, inventory, vehicles, and other significant assets, and put a value next to each.