Transcript Chapter 25 Introduction to Risk Management

Chapter
25
Introduction to
Risk Management
25.1 Understanding Risk
25.2 Managing Risk
© 2010 South-Western, Cengage Learning
Lesson 25.1
Understanding Risk
GOALS
Explain risk and the different types of
risk.
Explain the concept of insurance and
how risks are spread.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 2
Types of Risk
Pure risk
Speculative risk
Economic risk
Insurable risk
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 3
Pure Risk
 Pure risk is a chance of loss with no chance
for gain.
 Pure risks are random (can happen to anyone)
and result in loss (not gain).
 Examples of pure risk include the following:
 Accidents resulting in physical injury and damage to
property
 Illnesses that people get throughout life, as a part of
aging
 Acts of nature, resulting in damage to persons and
property
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 4
Speculative Risk
 A speculative risk may result in either gain or
loss.
 Because speculative risks are not “accidental”
or random, and may result in either gain or
loss, you cannot protect yourself from losses in
a traditional manner.
 While hedging (making an investment to help
offset against loss) is a technique used to help
reduce losses from such risky acts, it does not
reduce the risk itself.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 5
Economic Risk
 Economic risk may result in gain or loss
because of changing economic conditions.
 For example, when the business cycle is in a
period of recovery or growth, most people and
businesses are realizing gains in their financial
position.
 However, the economy can slow down.
 During this time, people lose jobs and are
unable to buy goods and services.
 As a result, many businesses find themselves
unable to meet their debts.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 6
Example of Bus. Cycle
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 7
Insurable Risk
 You can reduce negative consequences of a
pure risk by purchasing insurance.
 Insurance is a method for spreading individual
risk among a large group of people to make
losses more affordable for all.
 An insurable risk is a pure risk that is faced by
a large number of people and for which the
amount of the loss can be predicted.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 8
(continued)
Insurable Risk
 Insurance companies can make these
predictions by examining the amount of loss
incurred from past events, such as flooding.
 To purchase insurance, you must have an insurable
interest to protect.
 An insurable interest is any financial interest in life
or property such that, if the life or property were lost
or harmed, the insured would suffer financially.
 There are three major insurable risks:
personal, property, and liability.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 9
Personal Risk
 A personal risk is the chance of loss involving
your income and standard of living.
 You can protect yourself from personal risks by
buying life, health, and disability insurance.
 In addition, insurance against personal risks
protects others who are depending on your
income to provide food, clothing, shelter, and
the comforts of life.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 10
Property Risk
The chance of loss or harm to personal
or real property is called property risk.
For example, your home, car, or other
possessions could be damaged or destroyed
by fire, theft, wind, rain, accident, and other
hazards.
To protect against such risks, you can
buy property insurance.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 11
Liability Risk
 A liability risk is the chance of loss that may
occur when your errors or actions result in
injuries to others or damages to their property.
 For example, you could accidentally cause injury or
damage to others or their property by your conduct
while driving a car.
 Or a person could fall because of your home’s
crumbling front steps and break an arm.
 Liability insurance will protect you when others
sue you for injuring them or damaging their
property.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 12
Spreading the Risk
An insurance company, or insurer, is a
business that agrees to pay the cost of
potential future losses in exchange for
regular fee payments.
When people buy insurance, they join a
risk-sharing group by purchasing a
written insurance contract (a policy).
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 13
(continued)
Spreading the Risk
Under the policy, the insurer agrees to
assume an identified risk for a fee, called
the premium, usually paid at regular
intervals by the owner of the policy (the
policyholder).
The insurer collects insurance premiums
from policyholders under the assumption
that only a few policyholders will have
financial losses at any given time.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 14
Indemnification
Insurance is not meant to enrich—only to
compensate for actual losses incurred.
This principle is called indemnification.
Indemnification means putting the
policyholder back in the same financial
condition he or she was in before the loss
occurred.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 15
Insurance Terminology











Actuarial table
Actuary
Beneficiary
Benefits
Cash value
Claim
Coverage
Deductible
Exclusions
Face amount
Grace period










Hazard
Insurance agent
Insured
Insurer
Loss
Peril
Probability
Proof of loss
Standard policy
Unearned premium
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 16
Car Insurance must know
“HAVE TO HAVE” coverage
Personal Injury Protection
Property Protection
Residual Liability
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 17
Car Insurance must know
“YOU CHOOSE” Coverage
Collision
Regular, Broad, Limited
Comprehensive
Uninsured Motorist
Road Service
Car Rental
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 18
Car Insurance must know
$$$ of Insurance is determined by:
Location
Age & Driving Experience
Amount & Type of Driving you do
Car (AGE, COST, REPAIRABILITY)
Amount of coverage you select
At-Fault Accidents
# of traffic violations
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 19
Car Insurance must know
Auto Insurance MUST KNOW
Collision
This pays for damage to your car if it rolls over or
collides with something.
Without collision coverage, damages to your car
are not covered.
Collision coverage comes in three forms:
 Regular or standard - pays for damage to your vehicle,
regardless of who is at fault, except that you always
pay the deductible.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 20
Car Insurance must know
Collision (cont.)
Collision coverage comes in three forms:
Broad - pays for damage to your vehicle
regardless of who is at fault except that you must
pay the deductible if you are mostly at fault.
Limited - pays for damage to your vehicle only if
you were not mostly at fault in an accident.
Collision insurance usually includes a
deductible.
$ you pay toward cost of repair or replacement
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 21
Car Insurance must know
Comprehensive
This pays for damage to your car resulting
from causes other than collision, such as
fire, theft and crashes with deer.
Uninsured Motorist.
This pays what you would be legally entitled
to collect for injuries caused by an uninsured
driver.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 22
Car Insurance must know
Road Service
This pays for the cost of help when your car
is disabled on the road. It includes towing
charges and other emergency services
Car Rental
Pays for renting a car while yours is being
repaired.
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 23
Why Are Young Drivers
Rates So High?
 Age Group accident
each year
 16-24
 25-34
 35-44
 45-54
 55-64
 65-74
 75+
 Percent of drivers
involved in an auto
 24%
 18%
 18%
 18%
 12%
 6%
 7%
Chapter 25
© 2010 South-Western, Cengage Learning
SLIDE 24
Now it’s time to……….
Go to
kahoot.it
© 2010 South-Western, Cengage Learning