—

CHAPTER 23 LECTURE NOTES

1

Define risk and explain the nature of risk.

PPT 23-1

Chapter 23

Risk and Insurance

PPT 23-2

Chapter 23

Learning Objectives

A.    What is risk?

·       Risk is “a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.”

·       The two-part risk classification emphasizes the assets of the small business.

4       Market risk is the uncertainty associated with an investment decision.

4       Pure risk describes a situation where only loss or no loss (not gain) can occur. (This is the only insurable risk.)

2

Explain how risk management can be used in coping with business risks.

PPT 23-3/TM 23-1
The Process of

Risk Management
[Acetate 23-1]

PPT 23-4/TM 23-2

Ways to Deal with Risk

[Acetate 23-2]

B.       Risk management

1.        The process of risk management

4       Step 1: Identify risks

4       Step 2: Evaluate risks

4       Step 3: Select methods to manage risks

i         Risk control—minimize loss through avoidance and/or reduction.  Involve students in a discussion of what they would do to reduce the risk of shoplifting in a retail store.

i         Risk financing—risk transfer versus risk retention

4       Step 4: Implement the decision

4       Step 5: Evaluate and review

2.    Risk management and the small firm

i         The small business owner must actively manage risks.

i         Risk differs in several ways between large and small firms.  Discuss these with the students.

3

Describe the risks associated with different types of assets, both physical and human.

PPT 23-5/TM 23-3
Risks Associated

with Property

PPT 23-6/TM 23-4

Risks Associated

with Personnel

PPT 23-7/TM 23-5

Risks Associated

with Customers

PPT 23-8/TM 23-6

The Wheel of Misfortune

[Acetate 23-3]

C.      Classifying risks by type of asset

1.        Property risks—these involve tangible and high visible assets.

a.        Fire

b.       Natural disasters

c.        Burglary and business swindles

d.       Shoplifting

·          Review anti-shoplifting tactics outlined in the chapter. Ask students which of these they think would  be most likely to work.

·          Highlight the principle features of the profile of a shoplifter.

2.        Personnel risks—these result from the actions of employees.

a.        Employee dishonesty

·          Why are small businesses so vulnerable to employee fraud?

·          Review the list of best defenses against employee theft.

b.       Competition from former employees

c.        Loss of key executives

·          This is an often overlooked risk in small firms.  Ask students why.

·          Coverage comes from life insurance and the development of replacement personnel.

3.        Customer risks

a.        On-premises injuries—reduced through preventive maintenance

b.       Product liability

·           Product liability cases have been on the increase in recent years.

·           Ask students what they think are appropriate limits for such lawsuits.

4

Explain the basic principles used in evaluating an insurance program and the fundamental requirements for obtaining insurance.

PPT 23-9/TM 23-7
Basic Principles of a
Sound Insurance Program

D.      Insurance for the small business

·         Insurance is one of the most important means to transfer business risks.

·         Small firms usually have insufficient insurance. Ask students why this is so.

1.    Basic principles of a sound insurance program

             a.      Identifying insurable business risks

             b.     Limiting coverage to major potential losses

             c.      Relating premium costs to probability of loss

PPT 23-10/TM 23-8
Requirements for
Obtaining Insurance

2.    Requirements for obtaining insurance

             a.      The risk must be calculable

             b.     The risk must exist in large numbers

             c.      The insured property must have commercial value

             d.     The policyholder must have an insurable interest in the property or person insured

5

Identify the different types of insurance coverage.

PPT 23-11/TM 23-9
Types of Insurance

[Acetate 23-4]

3.    Types of insurance

                a.      Commercial property coverage—protecting against fire, explosion, vandalism, broken glass, business interruption, employee dishonesty.

·         Discuss the importance of business interruption insurance.

·         Explain dishonesty insurance (e.g., fidelity bonds, crime insurance).

·         Explain the meaning of a coinsurance clause.

             b.     Surety bonds—protecting against the failure of another firm or an individual to fulfill a contractual obligation

c.        Credit insurance—insuring against abnormal bad-debt losses

·          Available only to manufacturers and wholesales, not to retailers.

·          Only trade credit can be insured.

             d.     Commercial liability insurance—general liability insurance and employer’s liability/workers’ compensation

             e.      Key-person insurance—protecting against the death of key personnel

             f.      Disability insurance