Insuranceandriskmanagement

Insuranceandriskmanagement
Chapter 10 Risk Management and Insurance
A. Reviewing Issues for Chapter 10
1.Ways to protect against risk(Approaches to managing business risk): 1)avoid the risk (eliminate the risk): dentify the degree of the risk and try to avoid.
2)Control the risk: protect the risk from happening or reducing the degree of it.
3)Assume the risk: take the risk if loss from it can be neglected and accepted.
4)Shift the risk: transfer the risk by hedging or purchasing insurance. 2.Insurance: a risk-sharing mechanism whereby many individuals contribute to a pool of money which will be used to compensate those contributors who suffer losses.
1)premium: a sum of money paid by people who decide to use insurance to shift their risk.
2)Insurance policy: a formal agreement to pay the policyholder a specified amount in the event of losses.
3.Principles of insurance:
1)insurable interest: the insurance company can provide the insurance against the risk that really occurs and the insured suffers a loss from the risk.
2)Utmost good faith: the insured should tell the insurance company about everything in detail so that there won't be controversy over the amount of premium and compensation.
3)Indemnity: it is an insurance contract that promises to pay for the replacement or repair of lost or damaged goods. The insured can't obtain more compensation than the amount of loss he actually suffers. Indemnity can be classified into:
a.Contribution: it means that the total amount of compensation that the insured claims can only be the amount of indemnity figure no matter how many policies that he has to cover his risks.
b. Subrogation: the insurance company has the right to replace the insured.
4)proximate cause: the insurance company can only provide compensation when the insured risk is direct or closest cause of the loss the insured suffers.
4. Four types of insurance:
1)property insurance: an insurance to protect businesses from risk involving the damage and loss to their property.
Property insurance includes:
a.Fire insurance
b.Marine insurance: ocean marine and inland marine
c.Aviation insurance
d.Business interruption insurance
2)liability insurance: an insurance to cover losses resulting from damage to other people or other people's property.
a.General liability (comprehensive liability ): general liability policies protect policyholders against financial risks involving:
a)personal liability: persoanl liability coverage would protect
a hotel if its receptionist hits a client.
b)Professional liability: professional liability coverage would financially protect a surgeon should he cut off the left leg of a patient rather than the right which suffers from bone cancer.
c)Premises liability: premises liability coverage would protect a firm if a customer slips and falls on a wet floor and breaks his arm on the firm's premises.
d)Product liability:
b. Worker's compensation
c. Automobile insurance
3)health insurance: an insurance to cover surgical expenses and hospital expenses resulting from accidents and illness.
4)Life insurance:an insurance to cover risks occur to one's life.
a.Term life insuance: insurance premium is low and can cover for a certain period of time.
b.Whole life insurance: ( straight life insurance): it can provide savings with build-up cash value and life protection, but the insured pays every year.
c.Limited payment life insurance: it can provide savings and life protection, but the insured pays for limited numbers of years. Payment for limited numbers of years is the only difference from whole life insurance.
d.Endowment life insurance: it can provide savings and life protection, but premium is higher and build-up cash value of savings is faster.
5.Types of life insurance plan a business can buy for its employees:
1)group life insurance: an insurance to risks that may occur to all employees.
2)Key person insurance: an insurance to cover the risk taht a key person of a firm suddenly dies.
3)Credit life insurance: an insurance to cover the loss that creditors suffer when a debtor suddenly dies.
4)Retirement and pension plans: firms provide such plan which gives retirement income and pension after the employees retire.
6.Fidelity bond: an insurance protects an employer from financial loss resulting from employee dishonesty.
7.Surety bond: an insurance to cover losses due to a contract not being fulfilled as the parties to the contract fail to honour their obligations.。