BONUS CHAPTER C
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1. Identify the environmental changes that have
made risk management important.
2. Explain the four ways of managing risk, and
distinguish between insurable and uninsurable
3. Define insurance policies, and explain the law of
large numbers and the rule of indemnity.
4. Discuss the various types of insurance
businesses can buy to manage risk.
• Amos has been CEO of Aflac
for over 25 years.
• The company has decided to
only operate in the U.S. and
Japan covering expenses that
normal health insurance does
• Aflac is one of the 100 best
U.S. companies to work for
and Amos claims much of the
credit goes to the duck!
NAME that COMPANY
This type of insurance company is a nonprofit
organization owned by its policyholders. Any
excess funds (over losses, expenses, and
growth costs) go to the policyholders in the
form of dividends or premium reductions.
Name that company!
WHAT’S ENTERPRISE RISK
• Goals of enterprise risk management (ERM):
1) Defining which risks the program will manage.
2) What risk management processes, technologies, and
investments will be required.
3) How risk management efforts will be coordinated across
• Risk The chance of loss,
the degree of probability of
loss, and the amount of
• Speculative Risk A
chance of either profit or loss.
• Pure Risk The threat of
loss with no chance for profit.
HOW to DEAL with PURE RISK
1) Reduce the risk
2) Avoid the risk
3) Selfinsure against the risk
4) Buy insurance against the
MOST COSTLY DISASTERS
Central U.S. Drought
Northridge California Earthquake
911 Terrorist Attacks
Source: NOAA, www.noaa.gov, accessed November 2014.
WHAT’S SELF INSURANCE?
• SelfInsurance The practice of setting aside
money to cover routine claims and buying only
“catastrophe” insurance policies to cover big losses.
• Companies that self
insure can “go bare”
and pay claims from
their operating budgets
or set up special funds
to pay for claims.
WHAT RISKS are
• Uninsurable Risk A risk that no insurance
company will cover. Risks can include:
- Market risks
- Political risks
- Personal risks
- Operational risks
WHAT RISKS are INSURABLE?
• Insurable Risk A risk that the typical insurance
company will cover, using the following guidelines:
1) The policyholder must have an insurable interest.
2) The loss must be measurable.
3) The chance of loss must be measureable.
4) The loss must be accidental.
5) The insurance company’s risk should be dispersed
among different areas.
6) The insurance company can set standards for accepting
• Why are companies more aware now of the need
to manage risk?
• What is the difference between pure risk and
• What are the four major options for handling risk?
• What are some examples of uninsurable risk?
• Insurance Policy A written contract between the
insured and an insurance company that promises to
pay for all or part of the loss by the insured.
• Premium The fee the insurance company
charges, the cost of the policy to the insured.
• Claim A statement of loss that the insured sends to
the insurance company to request payment.
• Law of Large Numbers If a large number of
people or organizations are exposed to the same
risk, a predictable number of losses will occur during
a given period of time.
• Rule of Indemnity
An insured person or
organization can’t collect
more than the actual loss
from an insurable risk.
• Stock Insurance Company Owned by
stockholders, just like any other investorowned
• Mutual Insurance
organization owned by its
STOCK and MUTUAL
New York Life
• What is the law of large numbers?
• What is the rule of indemnity?
HEALTH INSURANCE CHANGES
• The Affordable Care Act has the government much
more involved in the health insurance process.
• We are likely to see many variations of health
coverage in the future.
OTHER TYPES of INSURANCE
• Disability insurance replaces
part of your income if you
become disabled and cannot
• Worker’s compensation
payment of wages, medical
care and rehabilitation for
employees injured on the
GETTING the MOST out of
1. Quit smoking, lose weight
and go to the gym!
2. Figure out how much
insurance you need.
3. Pick a good insurance
4. Find a good financial
Source: Entrepreneur, www.entrepreneur.com, accessed November 2014 .
• Professional liability insurance
covers people found liable for
professional negligence; also
known as malpractice
• Product liability insurance
covers liability arising out of
Photo Credit: Paul Wilson
• Homeowners’ policies
usually do not provide
protection for homebased
• For more coverage, you
may need to add a rider to
your homeowner’s policy.
• Cyber risk insurance can
help a business in case of
What You Need to Know About Home Insurance
1. Not all policies cover
2. Don’t buy too much
3. Small claims can add up.
4. The home’s history
Source: Money, www.money.com. accessed November 2014.
• Why should someone buy disability insurance?
• How many different kinds of private insurance can