Appendix D Notes (on Risk)

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Published on 5 Oct 2011
School
UTM
Department
Management
Course
MGM101H5
Page:
of 2
MGM Appendix D Notes
Understanding Business Risks
Risk management is about minimizing losses caused by unexpected events
Those who do businesses in foreign countries are at risk of social unrest
Rapid change in technology and global conditions make risk management difficult and
complex
Managing Risk
Risk is the chance of loss, the degree of probability of loss, and the amount of possible
loss.
Speculative loss is the chance of either loss or profit. When taking on speculative loss,
the investor has to do a risk/reward analysis.
Pure risk is loss that has no chance of profit. This includes fire, accident or shoplifting.
This loss requires insurance, and will be the main topic of discussion.
Firms can reduce pure risk by implementing internal controls such as fire drills, health
education, safety inspections, equipment maintenance, and surveillance cameras.
Product recalls also lessen risk, although it comes with a high cost
First step towards risk management is through these loss-prevention programs
Another way of reducing risk is to not participate in risky activities at all. Ex. not
accepting hazardous jobs
10% of GDP spent on insurance premiums.
Many smaller companies and not-for-profit organizations practice self-insurance, which
is setting aside money for unexpected events and buying insurance only for major
disasters.
Somethings that are uninsurable are market risks, political risks, and risks of operation
such as inefficient machinery
When evaluating whether a risk is insurable, insurance policies follow the following
guidelines:
Policyholder must have insurable interest, which means that they are the ones to
suffer the loss. You cannot buy insurance on another person’s property.
Loss should be measurable
Chance of loss should be measurable
Loss should be accidental
Risk of policyholders should be geographically dispersed
Understanding Insurance Policies
Insurance policy is the written contract between the insurance company and the insured.
The premium is the fee charged for the policy.
The law of large numbers dictates that if a large number of people or organizations are
exposed to the same risk, a predictable number of losses will happen in a set period of
time.
Premiums should cover losses and make a profit for for firm and stockholders
Insurance companies often invest premiums they collect to earn revenue
Rule of Indemnity states that a person cannot collect more than the actual loss from a
risk. If a person bought two policies for the same risk, the reimbursement would be split
between the two insurance companies.
Two major types of insurance companies:
Stock insurance company is owned by stockholders
mutual insurance company is owned by policyholders. No profit is made, as
excess funds are given back to policyholders in dividends or reduced premiums
Insurance Coverage for Different Kinds of Risk
Canada provides universal health care, but beyond this, individuals can buy benefit
plans sometimes provided by their employer.
Health care plan benefits include dental, extended health care, survivor’s benefits,
worldwide travel benefits, income continuance, and pensions.
Disability insurance replaces part of your income (50-70%) if you become disabled and
are unable to work. There is a period (~60 days) where you must be disabled before
you can start collecting the insurance. Usually company provided.
Provincial Workplace Safety and Insurance Boards guarantee wages, medical care, and
rehab services for employees who are injured on the job. All employers are required to
provide this insurance. Price of premiums depend on danger of specific jobs.
Liability insurance is to insure the losses and damages of which the policyholder is
responsible.
Professional liability insurance is malpractice insurance; most popular among
doctors and dentists. It is to mitigate the effect of lawsuits
Product liability insurance is to cover liabilities arising out of products sold (For
example, if a ladder breaks and the ladder company is sued)
Personal liability insurance is to cover personal acts
Premises liability insurance cover claims resulting from accidents occurring at the
property of the policyholder
Other Business Insurance
Entrepreneurs buy life insurance so that if he/she dies the people who are left behind will
have enough money to continue the business
Businesses can also buy key employee insurance
Home-based business entrepreneurs need to add a rider to their homeowner’s
insurance. They may also need to add a slip-and-fall rider if they have visitors.
Many businesses are doing what they can to minimize damage to the environment.
Such risks are beyond what a lone business can manage, and concern the entire world.
Refer to page 269 for list of other insurances that companies can buy

Document Summary

Risk is the chance of loss, the degree of probability of loss, and the amount of possible. Speculative loss is the chance of either loss or profit. When taking on speculative loss, the investor has to do a risk/reward analysis. Pure risk is loss that has no chance of profit. This loss requires insurance, and will be the main topic of discussion. Firms can reduce pure risk by implementing internal controls such as fire drills, health education, safety inspections, equipment maintenance, and surveillance cameras. Product recalls also lessen risk, although it comes with a high cost. First step towards risk management is through these loss-prevention programs. Another way of reducing risk is to not participate in risky activities at all. 10% of gdp spent on insurance premiums. Many smaller companies and not-for-profit organizations practice self-insurance, which is setting aside money for unexpected events and buying insurance only for major disasters.