Business risk & InsuranceBBA R-2

Business risk “Uncertainties which exist regarding the occurrence of some undesirable or unfavorable event in the performance of business”

“Probability that the future state of the business will be less successful than planned”

Types of risk Internal risk External risk

Internal risk Damage to property/firm or employeesInefficiency on part of management Injury from accidents Dishonesty Labor strikes Theft Misbehavior from employees Poor internal organizational structure

Increase cost of production

External risk Damage to factory by natural causes

Floods Earthquakes

Price reduction by competition businesses Impact on business by adverse legislative

changeLoss of external market Changing in habits of customer sAvailability of low priced better substitute goodsChange in technology

Managing risk Reducing or eliminating the risk

WatchmanInstallation of alarm systems Fire extinguishers

Efficient management Reserve cash Shifting of risk

Classification Three general types of events that cause

business risk:1. Events related to the property of the business2. Events related to personnel3. Events related to customers and others

Event causing risk 1. Property of the business:

Property involves specific forms of risk Inventory can be stolen, machinery can break Buildings can be damaged or destroyed Land may become contaminated Patents may be infringed upon

2. Events related to personnel: Theft, violation of government regulations,

loss of key employees

Event causing risk 3. Events related to customers and others:

Risk from customers primarily arises from: Injuries suffered while upon business property Injury or damage that is caused during the use

of the business’s products Product liability: payments for injury or

damage that occurs during the use of the business’s products

Event causing risk Events related to customers and others: (cont.)

Risk of nonpayment by customers is experienced by all business that offer credit

Balance two conflicting things when you decide to offer credit: It will increase your sales Offering credit guarantees sooner or later some

customer will not pay as promised

Insurance Contract b/w two parties whereby one party

agrees to indemnify the loss suffered by the other party for a consideration of some money called premiumInsurance policy

Insurance company Insurer

Party subject to risk Insured

Types of insuranceLife insurance Marine insurance Fire insurance

Principles of insurancePrinciple of insurable interest Principle of utmost good faith The indemnity principle

Exception of life insurance Doctrine of contribution Doctrine of proximate cause

Advantages of insurance Provides security Optimum allocation of resources Provides basis for credit Loss prevention activities Stabilizer of organization Covers unforeseen accidents Encouraging international trade Provides employment across the board Spread of risk Affording peace of mind

End of Lesson!