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

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.