knowt logo

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.

  • 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.

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.

  • 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.

robot