Chapter 14Risk Management

14.1: Overview of Risk Management

GOALS

» Identify the types of risks facing businesses

»Describe ways that businesses can deal with risks

Ask Yourself:

• What are you risking if…

–You don’t wear a seat belt when driving?–You don’t study for a test?–You skip work without calling your

boss?

Identifying Risks

• Every day you face risk• Risk is the possibility of incurring (facing) a

loss.• Can be a $$ loss, personal loss, emotional

loss, property loss, etc.• Can have lasting effect (serious illness, fire,

tornado)• Can be inconvenient but have little effect

(late for an appointment, caught in traffic)• Even if you are careful, you cannot avoid all

risks and losses• Our goal is to reduce as many as possible

Types of Risks

• Economic Risk: a risk that can result in financial loss– Personal Risk (can result in personal losses, such

as health and personal well-being)– Property Risk (can lead to loss of personal

property including money, vehicles, buildings)– Liability Risk (harm to other people or their

property because of your actions)– Non-Economic Risk: may be inconvenient or

embarrassing, but has no financial impact • EX: deciding to perform in the school talent show

• Pure Risk: risk that presents the chance of loss but no opportunity for gain (ex: severe weather—heavy snowstorm causes a business to close and lose sales)

• Speculative Risk: offers the chance to gain OR lose (ex: investing your money in a stock)

• Controllable Risk: a risk you can reduce or eliminate by taking the right actions (ex: install a security system to prevent theft)

• Uncontrollable Risk: nothing can be done to prevent these. (ex: sudden hail storm can dent up your car and cause you to get fixed)

• Insurable Risk: when a large number of people face a risk and the costs of losses can be predicted (ex: auto insurance accident claims)

• Uninsurable Risk: risk is uncommon and/or impossible to predict amount of the loss

Dealing with Risks

EX: suppose you and 9 friends each have a new set of golf clubs. Each set is worth $600. You decide to form an organization called Golf Club Owners Insurance Association (GCOIA). The purpose of your club is to reduce the RISK of a loss if someone’s clubs get stolen. To provide protection, each member agrees to split the cost of replacing any stolen clubs. Therefore, if your clubs are stolen, each person (including you) would pitch in $60 to replace. If you are not a member, you would have to pay the full $600 for new clubs.

– What does this say about sharing in risks?

• There are 4 ways to deal with risks

Avoid the Risk• Use careful thought and planning• If you don’t have enough experience or confidence,

don’t open your own business now• If there is snow in the forecast, don’t drive your car if

possible• To avoid risks, decision-makers need to be aware of

them• They must estimate the size of loss that could occur• If that loss is too much, they should decide to avoid

the action• This ensures there will be no loss

Transfer the Risk

• Sometimes an activity must occur even though there is a risk with serious consequences involved

• If a business is not in a position to assume (take on) the risk, they TRANSFER it (someone else assumes it instead)

• EX: a new company may not have the credit or the money to take on a risk in case it goes bad, so they transfer to another company with good credit a more money

Insure the Risk

• A business can purchase insurance to protect itself and its employees from losses

• EX: businesses purchase fire insurance

• Business will pay small amount for insurance to save from the thousands to spend on replacing furniture/equipment in case of fire, theft, storm, etc.

Assume the Risk

• Some companies decide if they suffer a loss, they will deal with the result

• They believe they have enough $ to cover• They might think they don’t want to spend the

extra $$ per month on insurance and just take the chance and hope nothing happens

• EX: company catches a huge flu virus, there may not be enough employees available to run the office for a few days.

14-1 Assessment

ANSWER QUESTIONS #1-4 IN TEXTBOOK. WRITE QUESTIONS AND ANSWERS

14-2: Insurable Risks

GOALS

• Recognize important insurance concepts

• Describe several types of business insurance

Purchasing Insurance

• Most people and businesses pay for insurance to avoid paying for large losses

• They have the peace of mind knowing that even if there is an accident or injury, they will be able to recover without a scratch

• You don’t have to pay for the costs of the loss

Insurance Basics

• The company who provides the coverage for a person or business is called the insurer– They agree to take on the risks and pay for losses

• The person or business who is being covered with insurance is the insured

• The company writes up a insurance policy, which states the details of the coverage and what the insurer will pay in case of a loss

• The person or company who buys the policy is the policyholder

More Insurance Basics

• The amount the policyholder must pay each month for the coverage is a premium

• A claim is a policyholder’s request for the insurance company to pay for a loss—a claim is filed

Insurance Companies

• Insurance companies provide protection for policyholders and are also an investment company– The monthly premiums they collect each month from people help pay

for claims that are filed– The premiums are invested and any extra money is profit for the

insurance company

• You can get insurance several ways– Buy insurance directly from a company– Provided by your employer when you work for them– Professional organizations may offer to members– Security companies purchase theft insurance to protect valuables

Insurance Companies

• An insurance agent represents the company and sells insurance to people and businesses

• Main part of an agent’s job is to help each customer choose the right insurance policy to suit their needs

• 2 basic types of agents:– Works for large company and sells

policies only for that company– Independent agent who works for

themselves and sells policies from many different companies at once

How Insurance Companies Work

• When a loss occurs, policyholders contact their insurance to file a claim

• The insurance company should promptly address the claim and get working on getting estimates for damages

• The insurance company issues a check to the policyholder to cover the damages estimated

• The policyholder deposits the check and fixes the damage

Insured Losses

• Violinists insure their fingers• Athletes insure their bodies• Businesses insure their building • Insurance most important to

people is: auto, health, property and life

• Liability Insurance: protects people from suing you for getting injured on your property

Business Insurance

• There are 3 major insurance categories for businesses:– Personnel– Property– Operations

Insuring Personnel

• Businesses offer several kinds of insurance to employees

• The company pays for part, and the employee pays for part our of their paycheck

• 4 main kinds of insurance for personnel:– Health– Disability– Life

Health Insurance

• Provides coverage for you to help with expensive doctor visits, procedures and hospital stays

• When a large number of people are covered under the same policy it is called group insurance

• The cost for each person is lower if more people sign up for the insurance coverage

Disability Insurance

• Pays people who are not able to work because they are disabled or have a serious illness

• You pay every month for this insurance and if this happens to you, you receive money each month

• Workers compensation is an example of this. It pays for injuries that people get on the job

Life Insurance

• Pays out money in the event someone dies that is insured

• You pay for life insurance each month and if you die, a large sum of money gets paid to the person/people you choose (beneficiaries)

• Usually family members• Business partners do this too in case one dies,

the other can use the money to help the business get back on its feet

Property Insurance

• Businesses by different insurance policies to protect their property– Commercial property insurance (covers

properties that are lost or damaged because of fire, storms, theft or vandalism)

– Vehicle Insurance (covers the cars/trucks/vans used for business if they are in an accident or damaged)

Insuring Business Operations

• The actions of employees my result in accidents, injuries, property damage, etc.

• The business can buy protection against these things called BUSINESS INTERRUPTION INSURANCE

• If the business experiences a loss, it will get paid for expenses that occur if the business needs to be shut down for a while for repairs

14-2 Assessment

• ANSWER QUESTIONS #1-4 IN TEXTBOOK. WRITE ANSWERS ONLY

14-3 Uninsurable Risks

GOALS

• Describe why some business risks are uninsurable

• List the strategies a company can use to reduce the risks of doing business internationally

Types of Uninsurable Risks

• Several circumstances can lead to business risks that can cost the company a lot of money– Economic conditions– Consumer demand– Competetors’ actions– Technology changes– Local factors– Business operations

Economic Conditions

• A change in the economy can quickly change the sales and profits of a business

• If a company does not cut down on their spending and production, it can experience real financial problems

• Managers need to be prepared for this type of economy slow-down

Consumer Demands

• Companies make products they think customers will want

• They study the needs and wants of people

• If customer tastes change, the company may end up with products they are unable to sell

Competitors’ Actions

• If a competitor comes out with a new product, starts a new advertising campaign or has a big sale, a business will have to decide whether to match it or not

• Making the wrong decision can result in a loss of sales

• If a company is not prepared for this kind of competition, its profits can quickly decline

Technology Changes

• If a company is not prepared to accept debit/credit cards it is taking the chance of losing customers

• When customers can download music from web sites, video/music stores are affected

• If a business doesn’t include new technology, it is risking losing customers and money

Local Factors

• Highways in front of restaurants might close• Electricity prices might go up• Laws of a community can influence the

operations of a business• Some businesses decide to move locations

where the community is more positive

Business Operations

• Day-to-day operations of a business can have a major impact on its success or failure

• Poorly run businesses will have higher costs, more employees quit and angry customers

• Managers must be committed to the success of the business by keeping customers happy and keeping costs low

Managing Risks

• Businesses need to enforce methods to gather information and spot possible problems

• Managers need to be aware of changes in the economy, competitors and new technologies

• Businesses should always inspect facilities and equipment to make sure they are running properly and safely

• Businesses should also work to keep a positive image within their community

Risks in International Business

• Would you will willing to ship a product to another country before receiving payment?

• Would you agree to take another country’s currency instead of the U.S. Dollar?

Strategies for Reducing Risks Internationally

• 4 strategies to reduce international risks:– Carry out business in many countries rather than

just 1 or 2– Offer a wide range of products• When you broaden your product line, if something else

doesn’t sell, it won’t be the end of the world

– Involve local business partners to help reduce social and political risks

– Hire local managers to lower your global risks• Better if your manager is from your country and

understand your culture rather than a foreigner

International Property Rights

• In some South American Countries, local companies who are NOT connected with the NBA make their own NBA shirts

• In China, street vendors illegally sell bootleg copies of popular movies, music videos and books

• These are both examples of violations of property rights

• Property Rights are the exclusive rights to have and use property and its profits

• Intellectual property refers to knowledge you have about something or your own creative work– Includes clothing designs, music, movies, books

• A patent is the right of an inventor to make, sell and use a product or process

• A trademark is a distinct name, symbol, word or picture used to identify a company

• A copyright protects the original work of authors, artists, inventors and publishers – Lasts their lifetime plus 70 years!

• Most other countries have similar laws

• Counterfeiting refers to illegal uses of property, patents, trademarks and copyrights– When someone uses another

actual product (even if they change it a little bit) and tries to make a profit on it

14-3 Assessment

• ANSWER QUESTIONS #1-4 IN TEXTBOOK. WRITE QUESTIONS AND ANSWERS