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.