1. Objective 5.02 Understand risk management and insurance. 1

2. Types of Risk 2

3. What is risk? The possibility of incurring a loss. What is risk management? It is a systematic process of managing risk to achieve set objectives. Different types of risk:  Economic and non-economic  Pure risk and speculative  Controllable risk and uncontrollable  Insurable risk and uninsurable 3

4. Types of Risk Economic  Results in financial loss.  Three categories of economic loss:  Personal risk – Result in personal losses  Property risk – Loss of personal or business property including money, buildings and vehicles.  Liability risk – Harm or injury to other people or their property because of your actions.  Example: Fred’s Diner incurred a loss due to a fire. 4

5. Types of Risk Non-economic  May result in embarrassment or inconvenience without financial impact.  Example: Requesting for customers to move to another check-out lane due to a computer problem. Pure  Threat of a loss without an opportunity for gain.  Example: Frost damages a strawberry patch. 5

6. Types of Risk Speculative Risk  Offers the chance of gain or loss.  Example: Mary opened a shoe store that operated for only six months. Controllable Risk  Occurs when conditions can be controlled to lessen the chance of harm.  Example: Lumber company automates much of their sawing process to remove the risk of accidents. 6

7. Types of Risk Uncontrollable Risk  Cannot be controlled or reduced by your actions.  Example: Riding along a highway with other speeding automobiles. Insurable Risk  Meets criteria of an insurance company for coverage.  Example: An artist purchased insurance to cover his collection. 7

8. Types of Risk Unpredictable amount of loss  Example: A competitor of Staples, an office supply store, moved right across the street. 8

9. Ways to handle risks 9

10. Ways to Handle Risks  Avoid  Transfer  Insure  Assume 10

11. Ways to Handle Risks Avoid the risk  Declining to engage in particular activities.  Example: A book company decline an order to produce 6000 books in one day. Transfer the risk  Allowing someone else to assume the risk.  Example: A book company has a contract for a trucking company to transport its books. 11

12. Ways to Handle Risks Insure the risk  Purchasing insurance to cover risk.  Example: General Electric sells insurance to customers to cover their appliances.  Assume risk  Finishing an activity and accepting full responsibility. 12

13. Business Insurance 13

14. Business Insurable Risks Personnel  Health insurance provides protection against the high costs of individual health care.  Disability insurance provides payments to employees who are unable to work for an extended period due to serious illness or injury.  Life insurance pays the amount of the insurance policy upon the death of the insured. 14

15. Business Insurable Risks Property  Insurance is purchased to protect business from financial loss due unsuspectingly damages to their buildings, equipment, and building contents, including inventory. Business Operations  Coverage as a result of accidents, injuries, and property damage. 15

16. Types of Uninsurable Risks Economic Conditions Consumer Demand Action of Competitors Technology Changes Local Factors Business Operations 16

17. Health Insurance Coverage 17

18. Health Insurance Coverage Hospital insurance  Classified as medical insurance.  Covers for most or all of the charges during a stay in the hospital. Surgical Insurance  Covers all or part of the surgeon’s fees for an operation. 18

19. Health Insurance Coverage Regular medical insurance  Covers fees for nonsurgical care given in the doctor’s office, the patient’s home, or a hospital. Major medical insurance  Covers cost of extended and specialized care out of the hospital such as medicine and special nursing care. 19

20. Health Insurance Coverage Comprehensive Medical Policy  Combines the features of hospital, surgical, regular, and major medical insurance. 20

21. Health Insurance Coverage Dental Insurance  Contains deductible and coinsurance to reduce the cost of premiums.  Covers examinations, X rays, cleaning and filling.  Covers dental injuries resulting from accidents.  Covers part or all of complicated dental work such as crowns or bridges. 21

22. Health Insurance Coverage Vision Care Insurance  Cover eye examinations, prescription lenses, frames, and contact lenses.  Some plans cover the cost of laser eye surgery that eliminates the need for glasses. 22

23. HEALTH INSURANCE PROVIDERS Health insurance may be obtained through employer related groups. They include:  Group health insurance  Managed care plans  Health Maintenance Organizations (HMO)  Preferred Provider Organizations (PPO)  State Government Programs 23

24. HEALTH INSURANCE PROVIDERS Group Health Insurance  Most popular way to buy health insurance.  Companies pay part or all of the premium for their employees. 24

25. HEALTH INSURANCE PROVIDERS Managed Care Plans  Health Maintenance Organization (HMO)  Consists of a staffed medical clinic to serve members.  Members are entitled to a wide range of prepaid health care services, including hospitalization. Preferred Provider Organization (PPO)  Provides a group of physicians, a clinic, or a hospital that contract with an insurance company.  Providers agree to charge a set fee for services.  Members are encouraged but not required to use the PPO services. 25

26. HEALTH INSURANCE PROVIDERS State Government Assistance  Workers Compensation: provides medical and survivor benefits for people injured, disabled, or killed on the job.  Medicare: Provides health coverage for most people over age 65 and some disabled persons, provides medical and hospital insurance  Medicaid: Covers certain individuals who need public assistance 26

27. Life Insurance 27

28. Life Insurance Principles Life insurance protects survivors against financial loss associated with death. Basic types:  Term  Permanent  Variable  Universal 28

29. Types of Life Insurance Term Life Insurance  Provides financial protection from losses resulting from a death during a definite period or term.  Least expensive form of life insurance.  Only life insurance that is purely life insurance without savings and investments. 29

30. Types of Life Insurance Permanent (Whole) Life Insurance  Has cash value and an investment feature.  Part of the premium paid is used for insurance that provides protection.  The insurance company invests part of the premium. 30

31. Types of Life Insurance Variable Life Insurance: Provides death benefits and savings, but allows the policyholder to determine how to invest the cash value Universal Life Insurance: Divides the premium three ways: death benefits, insurance company expenses, and investments or savings that earn a high interest rate

32. Types of Life Insurance Group Life Insurance  Covers a group of people.  Offers term rather than permanent insurance.  Individual is covered by their employer 32

33. Life Insurance Terms Dependent: A person that relies on another for financial support Proceeds: Money paid to the policyholder’s survivors Beneficiary: The person named in the policy who receives the proceeds Renewable Policy: A policy which the policyholder may renew for one or more terms without proving he is a good risk

34. Life Insurance Terms Cash Value: The amount of money received if a policyholder decides to give up the policy before his death Face Value: The amount of insurance coverage originally purchased which will be paid upon the policyholder’s death

35. Factors which Determine the Cost of Life Insurance Type of Life Insurance Purchased: whole, term, universal Age of Insured: how old the person is purchasing the insurance Health of Insured: current state of health, plus any previous illnesses or major injuries

36. Factors which Determine the Cost of Life Insurance Gender of Insured: the gender of the person purchasing insurance Face Amount of the Policy: amount of coverage being purchased, such as $100,000 Company Selected to Provide Insurance: the company the insurance policy is being purchased through, such as: All State, State Farm, Geico

37. Comparison of Different Types of Life Insurance In Relation to Type of Coverage Provided In Relation to the Cost Tobacco user vs. non-tobacco user Health screening vs. no health screening.