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*Bonus Chapter C

Managing Risk

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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*Understanding Business Risks

• Goals of enterprise risk management:

- Defining which risks the program will manage.

- What risk management processes, technologies and investments will be required.

- How risk management efforts will be coordinated across the firm.

WHAT’S ENTERPRISE RISK MANAGEMENT? LG1

C-2

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*Managing Risk

• Risk -- The chance of loss, the degree of probability of loss and the amount of possible loss.

• Speculative Risk -- A chance of either profit or loss.

• Pure Risk -- The threat of loss with no chance for profit.

WHAT’S RISK?

LG2

C-3

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*Self Insurance

• Self-Insurance -- The practice of setting aside money to cover routine claims and buying only “catastrophe” insurance policies to cover big losses.

WHAT’S SELF INSURANCE?

LG2

• Companies that self-insure can “go bare” and pay claims from its operating budget or set up a special fund to pay for claims.

C-4

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*What Risks are Uninsurable?

• Uninsurable Risk -- A risk that no insurance company will cover. Risks can include:

- Market risks

- Political risks

- Personal risks

- Operational risks

WHAT RISKS are UNINSURABLE?

LG2

C-5

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*What Risks are Insurable?

• Insurable Risk -- A risk that the typical insurance company will cover, using the following guidelines:

- The policyholder must have an insurable interest.

- The loss must be measurable.

- The chance of loss must be measureable.

- The loss must be accidental.

- The insurance company’s risk should be dispersed among different areas.

- The insurance company can set standards for accepting risks.

WHAT RISKS are INSURABLE?

LG2

C-6

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*Health Insurance

• Health Maintenance Organizations (HMOs) -- Offer a full range of healthcare benefits, with emphasis on helping members stay healthy through preventative care.

• Preferred Provider Organizations (PPOs) -- Contract with hospitals and physicians, members usually pay some part of the bill.

• Health Savings Accounts (HSAs) -- Tax-deferred savings accounts linked to low cost, high-deductible health insurance policies.

EMPLOYER HEALTH INSURANCE OPTIONS

LG4

C-7

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*Disability Insurance

• Disability insurance replaces part of your income if you become disabled and can’t work.

• Worker’s compensation insurance guarantees payment of wages, medical care and rehabilitation for employees injured on the job.

OTHER TYPES of INSURANCELG4

C-8

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*Liability Insurance

• Professional liability insurance covers people found liable for professional negligence; also known as malpractice insurance.

• Product liability insurance covers liability arising out of products sold.

LIABILITY INSURANCELG4

C-9