Chapter 33: The Basics of Risk Management

Types of Risk

Risk Management

• All people and businesses make decisions that create risk.

  • A $risk$$$risk$$ 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$$$insurable risk$$ is a risk that meets an insurance company’s criteria for insurance coverage.

• $Insurance$$$Insurance$$ is paid protection against loss due to injury or property damage.

• $Uninsurable risk$$$Uninsurable risk$$ 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$$$uncontrollable risk$$ cannot be controlled.

  • For example, risk involved in doing business in the global marketplace cannot be controlled.

• A $pure risk$$$pure risk$$ is the threat of a loss with no oppor- tunity for gain.

• $Economic risk$$$Economic risk$$ 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$$$natural risk$$ 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$$$premium$$ 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$$$peril$$ 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$$$Hazard$$ is anything that increases the likelihood of loss through peril.

• An $insurance policy$$$insurance policy$$ 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.