Lesson 26 Managing Risk

OVERVIEW This lesson defines the concept of risk and explains the difference between pure and speculative risks. The process of risk management is described, and the four general techniques of risk management are explained. The underlying principles of insurance are defined, and the two types of insurance company ownership are described. Several types of property and casualty insurance used to protect companies and individuals are described in detail. Special types of insurance for individuals and various types of life insurance are also described. The special factors that must be considered for international risk management are also explained.

LESSON ASSIGNMENTS Review the following assignments in order to schedule your time appropriately. Please note that the titles and numbers of the textbook chapter, the student course guide lesson, and the video program may be different from one another. Please note that the textbook reading for this lesson is reprinted in the back of this Student Course Guide. Text: Woelfle, Student Course Guide for Its Strictly Business, Appendix B, pp. B1B13 Video: Managing Risk from the series Its Strictly Business

LEARNING OBJECTIVES ObjectivesUpon completion of this lesson, you should be able to: 1. Define risk, and explain the difference between pure risk and speculative risk. 2. Define risk management and the four general techniques of risk management. 3. Discuss the underlying principles of insurance and the types of ownership of insurance companies. 4. Distinguish the types of insurance that can be used to protect businesses and individuals against property and casualty losses. 5. Describe the types of insurance available to individuals. 6. Describe the four kinds of life insurance. 7. Describe the special factors that must be considered for international risk management.

Lesson 26Managing Risk 195

KEY TERMS Look for these terms as you proceed through the lesson assignments. Be able to define them upon completion of this lesson. risk (p. B1) speculative risk (p. B1) pure risk (p. B1) risk management (p. B1) self-insurance (p. B3) insurer (or insurance company) (p. B3) premium (p. B3) insurance policy (p. B3) insurance (p. B3) insurable risk (p. B3) uninsurable risk (p. B3) principle of indemnity (p. B4) stock insurance company (p. B5) mutual insurance company (p. B6) fire insurance (p. B6) coinsurance clause (p. B7) extended coverage (p. B7) fidelity bond (p. B7) automobile liability insurance (p. B8) automobile physical damage insurance (p. B8) no-fault auto insurance (p. B9) public liability insurance (p. B9) product liability insurance (p. B9) ocean marine insurance (p. B10) inland marine insurance (p. B10) business interruption insurance (p. B10) workers compensation insurance (p. B11) health care insurance (p. B11) health maintenance organization (HMO) (p. B11) preferred provider organizations (PPOs) (p. B11) life insurance (p. B12) beneficiary (p. B12) term life insurance (p. B12) whole life insurance (p. B12) cash surrender value (p. B12) endowment life insurance (p. B13) universal life insurance (p. B13)

TEXT FOCUS POINTS The following focus points are designed to help you get the most from the text. Review them, then read the assignment. You may want to write notes to reinforce what you have learned. 1. What is the difference between pure and speculative risk? (p. B1) 2. Describe risk management and distinguish between the four techniques of risk management. (pp. B1B3) 3. What are the basic concepts of insurance? Describe indemnity and insurability of risk. (pp. B4 B5) 4. Identify the types of ownership of insurance companies. (pp. B5B6) 5. What is the effect of the coinsurance clause in a fire insurance policy? What does extended coverage extend? (p. B7) 6. What is the purpose of a fidelity bond? (p. B7) 7. What is the difference between automobile liability insurance and automobile physical damage insurance? Identify three liability coverages and three physical damage coverages. What is no-fault insurance? (pp. B8B9) 8. What is the difference between public liability insurance and product liability insurance? (p. B9) 9. Describe the types of insurance available to individuals. (pp. B10B12) 10. What is life insurance? Describe the four kinds. (p. B12B13)

Lesson 26Managing Risk 196

VIDEO FOCUS QUESTIONS The following video focus questions are designed to help you get the most from the video segment in this lesson. Review them first, then watch the video. Answer the questions as you watch the video. 1. According to the narrator, what is speculative risk? What examples are provided? 2. According to the narrator, what is pure risk? What examples are provided? 3. How does Dr. Patrick Brockette, professor of risk management at the University of Texas, define risk management? What three areas are included? 4. What is the ultimate reason risk management is important to a business, according to Dr. Patrick Brockette, professor of risk management at the University of Texas? 5. How does Dr. Patrick Brockette, professor of risk management at the University of Texas, explain the strategy of risk avoidance? What examples are provided? 6. How does Dr. Patrick Brockette, professor of risk management at the University of Texas, explain the strategy of risk reduction? What examples are provided? 7. How does Dr. Patrick Brockette, professor of risk management at the University of Texas, explain the strategy of risk assumption? What examples are provided? 8. How does Dr. Patrick Brockette, professor of risk management at the University of Texas, explain the strategy of risk transfer? What examples are provided? 9. What are the primary areas of risk at the museum, according to Douglas Harris, manager of protective services at the Dallas Museum of Art? 10. What risk avoidance actions are taken at the museum, according to Douglas Harris, manager of protective services at the Dallas Museum of Art? What risk transfer strategy is used? 11. Why did the company stop producing single-engine aircraft, according to Donald Franson, vice president of public relations at Cessna Aircraft Company? 12. According to Donald Franson, vice president of public relations at Cessna Aircraft Company, why did the company start producing single-engine aircraft again? 13. What was the biggest risk in opening the clinic, according to Dr. Dudley Baringer, president of the Healing Arts Urgent Care Center? Was it pure or speculative risk? What actions were taken to manage the risk? 14. According to the narrator, what actions were taken to transfer the risk at the clinic? To reduce the risk? 15. How does Dr. Dudley Baringer, president of the Healing Arts Urgent Care Center, explain malpractice insurance? 16. What statement does Dr. Dudley Baringer, president of the Healing Arts Urgent Care Center, make about the risk of litigation relative to malpractice? 17. What four risks of doing business in a foreign location are identified by Frank Kryza, director of external affairs at ARCO International Oil & Gas? Which are speculative risk and which are pure risk? 18. What strategy does the company use to manage political risk, according to Frank Kryza, director of external affairs at ARCO International Oil & Gas?

Lesson 26Managing Risk 197

PRACTICE TEST After reading the assignment, watching the video, and addressing the objectives, you should be able to complete the following Practice Test. Some questions in this Practice Test may be included in your exams. When you have completed the Practice Test, turn to the Answer Key to score your answers. MULTIPLE-CHOICE QUESTIONS 1. The opening of a branch store by the Kopy-Kwik Printing Company is an example of ________ risk. A. managed B. pure C. speculative D. small 2. The situation in which there is the possibility of a loss without a chance of gain is called a _______ risk. A. speculative B. pure C. calculated D. business 3. The four risk management techniques do NOT include _______ the risk. A. assuming B. avoiding C. reducing D. ignoring 4. When a jewelry store locks merchandise in a vault at the end of the day and a gasoline station accepts only exact amounts or credit cards after dark, these businesses are practicing __________ A. risk avoidance. B. risk elimination. C. risk reduction. D. risk assumption. 5. Which one of the following is NOT an insurable risk? A. A loss due to windstorm B. A loss of a key executive C. An undeterminable or unpredictable loss D. A measurable loss of property

Lesson 26Managing Risk 198

6. Tom, an insurance agent, was having a conversation with Jim Blackburn of Blackburn Music Supplies, Inc. Jim asked Tom to write a fire insurance policy for his music store. As Jim was signing the contract, he asked if it would be possible for him to purchase an insurance policy for his neighbors business as well. Tom said that could not be done because _______ A. it would increase rather than reduce the risk. B. the insurance company would have to charge lower premiums. C. insurers will not insure an item for its emotional or sentimental value. D. the policyholder who purchases an insurance policy must be the one who would suffer from a loss. 7. Kathy Thumme has a $40,000 life insurance policy. The premiums for this policy are $256 a year. At the end of each policy year, she receives a dividend of $121 on her policy. The company that issued the policy is a __________ A. public corporation. B. stock insurance company. C. mutual insurance company. D. chartered underwriter company. 8. An insurance policy that protects a business from theft, forgery, or embezzlement by its employees is called __________ A. a fidelity bond. B. robbery insurance. C. liability insurance. D. indemnity insurance. 9. Automobile liability insurance covers all of the following EXCEPT __________ A. property damage done to others. B. bodily injury to those in the other car. C. costs of repairing the policyholders vehicle. D. costs associated with the death of passengers in the other car. 10. What is public liability insurance? A. It protects the policyholder from financial loss due to injuries suffered by others as a result of using the policyholders product. B. It protects the policyholder from financial loss due to injuries suffered by others as a result of negligence on the part of a business owner or employee. C. It is a method for paying for losses suffered in an auto accident. D. It protects the policyholder from financial losses due to damage of cargo in transport. 11. Established by the Social Security Act, the Social Security program is financed by __________ A. the city government. B. state governments. C. employees. D. both employees and employers.

Lesson 26Managing Risk 199

12. Claudette Biasco pays a fixed monthly fee for the healthcare coverage provided by her employer. In return, the insurance company agrees to pay her medical costs. Claudette is covered by __________ A. Social Security. B. an endowment plan. C. a health maintenance organization. D. a major medical plan. 13. Individuals named as recipients of life insurance proceeds are known as __________ A. insurers. B. beneficiaries. C. survivors. D. actuaries. 14. Anjali Mehra is a newlywed who wants to start off right. She would like to purchase an inexpensive life insurance policy that will provide as much protection to her beneficiaries as possible. What type of policy would you recommend? A. Whole life B. Straight Life C. Term Life D. Endowment Life 15. For as long as the policy is in force, the premiums of the whole life insurance policy _______ A. increase. B. decrease. C. remain constant. D. are negotiable. 16. In the video Managing Risk, the narrator explains that pure risk __________ A. cannot be avoided by management. B. can reduce staffing. C. may bring long range profitability if managed well. D. can result in only a loss. 17. In the video Managing Risk, Douglas Harris, manager of protective services at the Dallas Museum of Art, explains that the risk avoidance management actions of the museum include __________ A. purchasing special insurance coverage. B. staffing the galleries with security personnel to ensure that visitors do not get close to the art. C. installing fire alarms and sprinklers. D. charging admission to cover potential losses.

Lesson 26Managing Risk 200

18. In the video Managing Risk, David Franson, vice president of public relations at Cessna Aircraft, explains that his company started producing single-engine aircraft again because __________ A. customers wanted to buy aircraft with a long history. B. airports installed better safety facilities. C. smaller aircraft get better gas mileage. D. the General Aviation Revitalization Act reduced potential product liability costs. 19. In the video Managing Risk, Dr. Dudley Baringer, president of the Healing Arts Urgent Care Center, indicates that malpractice insurance is a device to __________ A. protect patients from insurance fraud. B. increase the profits of medical care facilities. C. protect physicians from personal losses in litigation suffered from patient complaints. D. encourage doctors to seek more training. 20. In the video Managing Risk, Frank Kryza, director of external Affairs at ARCO International Oil & Gas Company, indicates that the strategy the company uses to manage political risk overseas is to __________ A. purchase large amounts of insurance. B. hire armed guards to protect property. C. understand the host country and create agreements that are perceived to be fair. D. staff with a mixture of host country personnel and American personnel.

ESSAY QUESTIONS 21. Define risk. Compare and contrast speculative risk and pure risk. 22. Could you, as a business person, shift your risk of having your store destroyed? If possible, how would you go about it? If not possible, why not? 23. What major insurance coverages are provided in an automobile liability insurance? 24. What are the differences between public liability insurance and product liability insurance? What types of losses are covered by such insurance policies? 25. Describe the four strategies used for risk management, and explain one example of each strategy.

Lesson 26Managing Risk 201

ANSWER KEY The following provides the answers and references for the Practice Test questions. Learning Objectives are referenced.
Answer Learning Objective Reference 1. C .......................................................................... 1 ................................................................. Pride, p. B1 2. B .......................................................................... 1 ................................................................. Pride, p. B1 3. D .......................................................................... 2 ........................................................ Pride, pp. B2B3 4. A .......................................................................... 2 ................................................................. Pride, p. B2 5. C .......................................................................... 3 ................................................................. Pride, p. B5 6. D .......................................................................... 3 ................................................................. Pride, p. B5 7. C .......................................................................... 3 ................................................................. Pride, p. B6 8. A .......................................................................... 4 ................................................................. Pride, p. B7 9. C .......................................................................... 4 ................................................................. Pride, p. B8 10. B .......................................................................... 4 ................................................................. Pride, p. B9 11. D .......................................................................... 5 ............................................................... Pride, p. B10 12. C .......................................................................... 5 ............................................................... Pride, p. B11 13. B .......................................................................... 6 ............................................................... Pride, p. B12 14. C .......................................................................... 6 ............................................................... Pride, p. B12 15. C .......................................................................... 6 ............................................................... Pride, p. B12 16. D .......................................................................... 1 .......................................................................... Video 17. B .......................................................................... 2 .......................................................................... Video 18. D .......................................................................... 4 .......................................................................... Video 19. C .......................................................................... 4 .......................................................................... Video 20. C .......................................................................... 7 .......................................................................... Video 21. ............................................................................. 1 ................................................................. Pride, p. B1 22. ............................................................................. 2 ................................................................. Pride, p. B3 23. ............................................................................. 4 ................................................................. Pride, p. B8 24. ............................................................................. 4 ................................................................. Pride, p. B9 25. ............................................................................. 2 .......................................................................... Video

Lesson 26Managing Risk 202