Date post: | 07-Nov-2014 |
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Economy & Finance |
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BUSINESS RISKS AND INSURANCE
BY
ANAM RAFIQUE, NAILA RAFIQUE ,
FAIZA JAMIL, NOOR-UL-AIN, IRAM SHAHZADI
AND
UZMA BATOOL
Definition of business
According to James Stephenson,
“Every human activity which is engaged in for the sake of earning
profit may be called business”.
What is risk?
• Risk – the possibility of loss• or injury • Business risk – risk of loss
that is naturally incurred by owing and operating a business
TYPES OF BUSINESS RISKS
• Insurable vs. uninsurable risk• Controllable vs. uncontrollable risk
Pure riskEconomic riskHuman riskNatural risk
OTHER TYPES OF RISK
PURE RISK
o Threat of loss with no opportunity for gain
Examples
Employee theft
Burglary
Bad checks
Accidents
Involving Customers or employees
Economic risk
• Occurs when there is likelihood of financial loss
• May result from changes in overall business conditions
EXAMPLE
• If a competitor offers more features, other businesses need to change their product or face losses
Human risk
• Risk of harm caused by human mistakes, dishonesty or other factors attributed to people
EXAMPLES
• Customer dishonesty• Fraudulent payment• Theft incompetence of employees
Natural risk
• The possibility of a catastrophe caused by natural elements that can cause damage of loss or property
EXAMPLE
• Floods• Tornados• Hurricanes• Fires• Lightning• Droughts• Earthquakes etc.
Types of businesses
Small scale businesses
Medium scale businesses
Large scale businesses
Small businesses
Number of people in small businesses are less than 100Annual revenue is less than $ 7 million
Common risks in small businesses
• Breakdown of machinery and equipment• High employees turnover or loss of key staff
members especially if they have unique skills• Security of data and intellectual property• theft
Common risks
• Bad debts creating customers• Increase in competition• Negative cash flow• Natural disasters such as fires and storms
Medium scale business
• Number of people in such businesses is from 100 to 500
• Annual revenue is between $7 million to $35 million dollar(estimate)
COMMON RISKS
Intellectual property
Theft
Increased competition
Common risks
• Operational risk• Political risk• Country risk• Technological risk• Environmental risk• Economic risk• Financial risk • Terrorism risk
Large scale businesses
• Number of people in such business organization is more than 500
• Annual revenue is more than $35 million (estimate)
Flood Earthquake
Natural causes are beyond the control of humansNatural disasters can lead to huge losses in businessWhich mainly occur due to natural calamities such as
earthquakes and flood etc.
NATURAL CAUSES
Strikes, dishonesty, carelessness are examples of human causes of business risk
Dishonesty of employees, misappropriation of cash and theft of goods may also become a cause of loss for business
HUMAN CAUSES
Which is caused mainly due to fluctuation in the market prices of various commodities
Inflation and unemployment are examples of economic causes of business risk
Trade cycle and other unforeseen changes in the economy may also create business risks
ECONOMIC CAUSES
Assets used in business may depreciate in value Technical changes and mechanical defects also result
in business risks
PHYSICAL CAUSES
Some political events can change the business scenario
A major policy change by government can change the business environment
Changes in the taxation policies create uncertainty and loss
political disturbances such as fall of government and civil war etc. may lead to heavy loss in business
POLITICAL CAUSES
Methods Of Risk ProtectionReducing or eliminating the risk
Efficient management
A reserve cash
Shifting of risks
Reducing or eliminating risk
Efficient management
A reserve cash
Shifting of risk
INSURANCE
Introduction
Contract between two parties Process of collecting money Compensation to losses
DEFINITION
According to Oxford Dictionary,“Insurance means undertaking, by a company, society or the state to provide safeguard against loss, provision against sickness, death, etc. in return for regular payments.”
MAIN POINTS OF DEFINITION
An undertaking Safeguard
Benefits of insurance to individualsPeace of mindAversion of riskProtects mortgaged propertiesProvides self dependencyTool of savingsTool of investment
Benefits of insurance to business
• Reduce reserve requirements• Capital freed for investment • Reduction of uncertainty• Loss control activities• Business and social stability
Benefits of insurance to society Protects wealth of country Helps in economic growth Control inflation
PRINCIPLES OF INSURANCE
• Utmost good faith• The principle of
indemnity• Proximate cause• Mitigation of loss• Arbitration
Utmost good faith
• Contract between insured and insurer• Both parties should disclose all facts to each
other• A false information or non disclosure of
material facts makes the contract invalid
The principle of indemnity
• All insurance contracts, except life insurance are the contract for indemnity
• The assured shall be compensated in case of loss only
• The insured is not allowed to receive a higher amount than the amount of loss
Proximate cause
An insured person can recover the only when it is caused by any of the risk insured against. e.g.
cargo of wheat and rats
Mitigation of loss• Insured should take all reasonable steps to
minimize the amount of loss• He can recover the same from insurer if
he suffer loss in doing so.• If he does not take care, his claim might
be lost
Cancellation
• Both parties have right to cancel or terminate the insurance before its expiry date
• Their relationship come to an end on the date of cancellation of policy
Life insurance
Life insurance
We can define life insurance as a contract in which insured person pay regular premium to the insurer i.e. insurance company
On the death of the insured or at the maturity period, the insurance company pay the compensation or the matured sum respectively
Marine insurance
This insurance is done by businesses for safety delivery of goods, while transferring goods from one place to another by sea way, land way, air way
Fire insurance
Fire insurance
Fire insurance is an insurance that cover property such as home, shop and other fixed asset protection against fire, burn etc.
It also cover distraction of property due to fire
Which companies provide insurance in Pakistan
• Adamjee insurance company limited(Karachi)• Alpha insurance company limited (Karachi)• Fins insurance company limited • The united insurance company of Pakistan ltd• Asia insurance company limited• Premier insurance company limited• Reliance insurance company limited• Universal insurance company limited
PROBLEMS OF INSURANCE IN DEVELOPING COUNTRIES
Economic Backwardness
Poverty
IlliteracyReligious
beliefs
Trend of Insurance
Economic backwardness
• Lack of resources• Limited scope of business activities• Lack of professional management
POVERTY
Lack of savings Basic needs of life
ILLITERACY
Illiterate majority Ignorance Views of people
RELIGIOUS BELIEFS
Varying opinions of religious scholars Deep attachment to scholars People considered it to be a form of Riba
TREND OF INSURANCE
No fore sightness Legacy of people
Conclusion
Our visit O To
state life insurance company limited
ANY QUESTION