Chapter 14 Risk Management

Risks?

Types of Risks Economic and non-economic risks Pure and speculative risks Controllable and uncontrollable risks Insurable and uninsurable risks

Economic and non-economic Economic risk Can result in financial loss Personal risk Can result in personal losses such as health and personal well-being Property risk Can lead to loss of personal or business property including money, vehicles, and buildings Liability risk Relates to harm or injury to other people or their property as a result of your actions

Pure and Speculative Risks Pure risk is a risk that presents the chance of loss but no opportunity for gain is a pure risk. Weather Speculative risk offers the chance either to gain or to lose. Investing in a new business, stock market

Controllable and Uncontrollable A risk that you can reduce or eliminate by your actions is controllable Protecting yourself from theft by adding security measures Uncontrollable risks cannot be reduced by your actions. Hailstorm

What is a risk? Risk is the possibility of incurring a loss.

OK, so how do you deal with risk? Avoid it! Transfer it. Insure the risk Assume the risk Yikes! Gotta go!

Four Possible Ways to Deal with Risk Method Activity Avoid Choose not to participate in the risky activity. Transfer Find another business to complete the activity. Insure Purchases insurance to pay for any losses. Assume Complete the activity with full responsibility.

Insurable Risks How do individuals and businesses pay for large economic losses? Insurance – planned protection against economic losses. Provided by insurers or insurance companies Provided on behalf of the insured Risks covered are outlined in an insurance policy The insured is also known as the policyholder The payment for the policy is known as the premium Asking for money when an insured loss occurs is called filing a claim.

Categories of Business Insurance Personnel Operations Property

Personnel Health Protects against high costs of individual health care

Personnel Disability Provides payments to employees who are not able to work for an extended period of time due to illness or injury

Personnel Life Beneficiaries Family Partners Key executives

Property Insurance Commercial property Buildings Equipment Building contents, including inventory Protection covers property losses resulting from fire, storms, accidents, theft, and vandalism. Special policies can also provide coverage for flood damage and earthquakes.

Vehicle Insurance Autos Trucks Other business vehicles

Business Operations Insurance to provide compensation for ongoing business expenses for temporary shutdown due to flood, fire, or other major problem. Liability insurance provides coverage for claims by others based on damages suffered because of business operations, employees, or products.

Uninsurable Risks The costs of some risks are so high that a business cannot afford the cost of insurance protection.

What’s Uninsurable? Economic Conditions Recession, Depression Consumer Demand Can’t always count on consumer loyalty Competitors’ Actions Better advertising, better product, better service

What’s Uninsurable? Technology Changes Local Factors If you can’t adapt you can be left behind! Local Factors Construction in front of the business, new highway bypasses the town, laws, taxes . . . Business Operations Bad business practices can cause higher costs, low morale, poor customer image.

Managing Risks Awareness Continuous study of risk areas Stay aware of changes in the economy, competitors’ actions, and technology Collect and review customer information Complaints and requests

4 Strategies for Reducing Risk in International Business Carry out business in many countries (spread the love) Offer a range of products (eggs in more than one basket) Involve local business partners Employ local management

International Property Rights Exclusive rights to possess and use property and its profits Nobody else can interfere with the use of them. Intellectual property Technical knowledge or creative work Software, clothing designs, music, books, and movies Patent Exclusive right of an inventor to make, sell, and use a product or process. Designed to encourage innovation and progress.

International Property Rights Trademark A distinctive name, symbol, word, picture, or combination of these that a company uses to identify products or services. Copyright Protects the original works of authors, composers, playwrights, artists, and publishers. Counterfeiting Refers to illegal uses of intellectual property, patents, trademarks, and copyrights.

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