Chapter 33: The Basics of Risk Management

Types of Risk

Risk Management

All people and businesses make decisions that create risk.
* A $risk$ is the possibility of loss or injury
Business risk is risk that businesses specifically face, such as the potential for financial loss.
You cannot eliminate all risk, but you can reduce and manage it.
Risk management is the systematic process of managing risk to achieve your objectives.

Types of Risk

There are several different types of risk.
* Risk may be insurable or uninsurable, as well as controllable or uncontrollable.
* Risk can be further identified as pure, economic, human, or natural risk.
An $insurable risk$ is a risk that meets an insurance company’s criteria for insurance coverage.
$Insurance$ is paid protection against loss due to injury or property damage.
$Uninsurable risk$ is a risk that is unacceptable to insurance carriers because the likelihood of loss is too high.
Controllable risk occurs when conditions can be controlled to minimize the chance of harm
An $uncontrollable risk$ cannot be controlled.
* For example, risk involved in doing business in the global marketplace cannot be controlled.
A $pure risk$ is the threat of a loss with no oppor- tunity for gain.
$Economic risk$ occurs when there is likelihood of economic loss.
* Economic risk can be related to property and to your own personal well-being.
It can be placed in three categories: personal risk, property risk, and liability risk.
  * Personal risk is risk associated with illness, disability, loss of income, unemployment, aging, and premature death.
  * Property risk is the risk of damage to or loss of property due to theft, wind, fire, flood, or some other hazard.
  * Liability risk is the potential for losses to others that occur as a result of injury or damage that you may have caused.
Human risk is the risk of harm caused by human mistakes, dishonesty, or another risk that is attributed to people.
* Human risk can be caused by customer theft, fraudulent payment, or nonpayment.
* Employees represent another human risk to businesses.
Over the past decade, computer-related crime has emerged as a significant new human risk to business.
* People try to avoid risks associated with crime by taking precautions at home and in public.
A $natural risk$ is the possibility of a catastrophe caused by a flood, tornado, hurricane, fire, lightning, drought, or earthquake.

Handling Risk

Avoiding risk involves thinking about the consequences of decisions.
* For a business, risk avoidance means refusing to engage in a particularly hazardous activity.
Some risk cannot be avoided entirely.
* Instead you may need to practice risk reduction.
Business owners reduce risk by designing work areas to lower the chances of accidents or fire.
For most businesses, the best way to reduce risk from employee carelessness and incompetence is through effective employee screening, orientation, and training.
It may be impossible to avoid certain types of risk.
Bearing financial responsibility for the consequences of loss is called risk retention
* A business may retain the risk that customer tastes will change and merchandise will not sell.
Insurance provides a way to transfer a risk of loss to an insurance company.

Insurance Protection

Insurance protection requires careful planning and decision making.
* With insurance protection, no one person or business has to bear a loss alone.
A $premium$ is the price an insured person or business pays for insurance protection for a specified period of time.
Risk, peril, and hazard are important terms in insurance.
While risk is the chance of loss or injury, $peril$ is anything that may possibly cause a loss.
* People buy insurance against a wide range of perils, including fire, windstorms, explosions, robbery, and accidents.
$Hazard$ is anything that increases the likelihood of loss through peril.
An $insurance policy$ is a contract between a person and an insurance company to cover a specific risk.
There are several types of insurance for consumers.
  * Life insurance offers protection for family members after someone dies.
  * Property insurance covers damages or losses to your property.
  * Conversely, liability insurance covers damages that you may have caused accidentally to someone else or to someone’s property.
  * Health insurance provides money to pay medical bills in case of accident or sickness.
  * Companies carry workers’ compensation insurance to protect workers who are injured on the job.