Business Administration & Management Mr. Bernstein Insurance and Risk Reduction, pp 492-504 June 12, 2013

Business Administration & Management Mr. Bernstein Types of Risk Businesses Face Speculative Risk: Profit or Loss Product Market People Financial Competitors

Business Administration & Management Mr. Bernstein Types of Risk Businesses Face Pure Risk: Risk of Loss with no potential for upside Crime - Small Businesses 35x more likely to be victims than Large Businesses Employee Theft – “Shrinkage” > shoplifting Burglary, Robbery Credit Card fraud, bad checks Natural Disasters Fire Accidents and Injury

Business Administration & Management Mr. Bernstein Insurable Risks Pure Risk Losses can be estimated Uninsurable Risks (see slides 8-12) Economic conditions, Consumer Demand, Competitor Actions, Technology

Business Administration & Management Mr. Bernstein Reducing Insurance Costs: Controllable Risks Can be reduced by actions (ie theft) Uncontrollable Risks Cannot affect with actions (ie weather)

Business Administration & Management Mr. Bernstein Types of Insurance Available Property Insurance Business Interruption Insurance Liability Insurance Life Insurance Worker’s Compensation Flood (not usually included in Property Insurance)

Business Administration & Management Mr. Bernstein How insurance rates are established Insurance companies will insure against risks which both loss amounts and frequency can be estimated Actuaries analyze data and make those estimates Deductible amounts reduce premiums

Business Administration & Management Mr. Bernstein Uninsurable Risks Economic conditions, Consumer Demand, Competitor Actions, Technology Advances Black Swan Events Rare events beyond the realm of normal expectations

Business Administration & Management Mr. Bernstein Reputational Risk 85% of international firms consider brand their most important asset Respondents ranked “loss of reputation” their greatest risk. Source: Interbrand /Citibank and Knight, RF & Pretty, DJ, Reputation & Value - the case of Corporate catastrophes

Business Administration & Management Mr. Bernstein Reputation is: An intangible asset Greater than brand Sum total of all stakeholders’ experience

Business Administration & Management Mr. Bernstein Management of reputation is crucial “If I lost all of my factories and trucks but kept the name Coca-Cola, I could rebuild my business. If I lost my name, the business would collapse”. CEO, Coca-Cola

Business Administration & Management Mr. Bernstein Management of reputation is crucial Reputation is damaged when something is done that causes stakeholders to lose trust in an organization It does not matter whether it is real – it is the perception that counts. Reputation can be destroyed very rapidly Have a crisis plan