Business Risks and Mitigation

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Questions and Answers

How does insurance serve as a means of spreading risk?

Insurance spreads risk by pooling premiums from many individuals to compensate the losses of a few, thereby reducing the financial impact on any single individual or business.

What is the difference between 'uncertainties' and 'risks' in the context of business, and how are they handled differently?

Uncertainties are unforeseen events, while risks can be anticipated based on past experience. Risks can be prepared for with precautions, whereas uncertainties are difficult to plan for.

In the context of insurance, what is meant by 'premium,' and what role does it play in the insurance contract?

Premium is the fee paid by the insured to the insurer in exchange for the insurer's promise to compensate for specified potential losses. It essentially funds the insurance pool.

What is the fundamental difference between 'life insurance' and 'fire insurance' regarding the principle of indemnity?

<p>Fire insurance adheres to the principle of indemnity, compensating only for the actual loss up to the policy limit, whereas life insurance does not fully adhere to the indemnity principle because the value of a life is not fully recoverable.</p> Signup and view all the answers

Differentiate between 'speculative risk' and 'pure risk' in the context of insurance, providing an example of each.

<p>Speculative risk involves potential for both profit and loss (e.g., investments), whereas pure risk only involves potential for loss (e.g., fire).</p> Signup and view all the answers

Explain the principle of 'utmost good faith' in insurance contracts, and provide an example of what could be considered a breach of this principle.

<p>Utmost good faith requires both the insurer and insured to disclose all relevant information truthfully. Failure to disclose a pre-existing medical condition in a life insurance application would be a breach.</p> Signup and view all the answers

Describe how 'marine insurance' can be used to mitigate risks associated with international trade, and give an example of a specific type of marine insurance policy.

<p>Marine insurance protects against loss or damage to goods during transit by sea, covering risks like storms or accidents. Voyage policy covers a single journey, protecting goods during a specific voyage.</p> Signup and view all the answers

In what way does 'subrogation' benefit the insurer after compensating the insured for a loss?

<p>Subrogation allows the insurer to pursue any rights or claims that the insured had against a third party responsible for the loss, potentially recovering some or all of the compensation paid.</p> Signup and view all the answers

Explain how 'Fidelity Insurance' works and the specific risk it is designed to mitigate within a business. Also, who typically signs a 'fidelity guarantee bond'?

<p>Fidelity insurance protects businesses against losses due to employee dishonesty (e.g., theft or embezzlement). Employees handling cash or stores typically sign a fidelity guarantee bond.</p> Signup and view all the answers

What measures should an insured party take following a loss to satisfy the principle of 'mitigation'?

<p>The insured must take reasonable steps to minimize the extent of the loss or damage, as if they were not insured ensuring they do not demonstrate negligent behavior.</p> Signup and view all the answers

Explain 'causa proxima' (nearest cause) in the context of insurance claims. Provide an example where a claim might be rejected based on this principle.

<p>'Causa proxima' means the insured loss must be directly caused by an insured event. A claim for spoiled oranges due to unloading delays, despite ship insurance against accidents, might be rejected.</p> Signup and view all the answers

How does 'contribution' work when the same property is insured with multiple insurers?

<p>Each insurer shares the loss in proportion to the amount of insurance they provided, preventing the insured from making a profit from insurance.</p> Signup and view all the answers

What is 'hull insurance,' and in what scenarios would a shipping company utilize this type of insurance?

<p>Hull insurance covers physical damage or loss to the ship itself. A shipping company would use it to protect their vessel against perils of the sea, such as storms or collisions.</p> Signup and view all the answers

Explain the difference between a 'whole life policy' and an 'endowment policy,' highlighting when the sum assured becomes payable in each case.

<p>A whole life policy pays out upon the death of the insured, whereas an endowment policy pays out either at the end of a specified term or upon the death of the insured, whichever occurs earlier.</p> Signup and view all the answers

In the context of insurance, what is meant by 'insurable interest,' and why is possessing it a prerequisite for obtaining coverage?

<p>'Insurable interest' means having a financial stake in the insured item or person, such that a loss would cause financial harm. It prevents gambling on insurance policies.</p> Signup and view all the answers

Flashcards

What is Business Risk?

The possibility of loss or damage due to factors beyond a businessman's control.

What is Insurance?

A method to transfer risks of loss or damage to an insurer for a fee.

What is Speculative Risk?

Risks based on speculation and business decisions.

What is Pure Risk?

Risks with predictable chance of loss.

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How Insurance Works?

Transferring risks to an insurer by paying a fee.

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What is a Premium?

The fee paid by the insured to the insurer.

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Types of Insurance?

Life, fire, and marine insurance.

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What is Life Insurance?

A policy that pays out upon the insured's death or after a set time.

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What is Fire Insurance?

A policy against damage or loss from fire.

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What is Marine Insurance?

A policy covering loss or damage to ships or cargo.

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What is Utmost Good Faith?

Mutual truthfulness between insurer and insured.

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What is Insurable Interest?

Financial interest in the insured item or person.

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What is Indemnity?

Restoring someone to their original position after a loss.

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What is Contribution?

Insurers sharing the cost of a claim.

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What is Subrogation?

Insurer's rights to the insured's rights after compensation.

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Study Notes

  • Shops and factories store articles or install machines
  • Trains, trucks, and ships carry goods from one place to another

Business Risks

  • Involves the risk of loss
  • Storing goods has risk of damage before sold
  • Damage can result from fire, natural disaster, riot, or theft
  • Machines in factories face risk of breakdown costing heavy losses
  • Goods face damage or destruction by accident during transportation
  • Business owners are at risk of disease or accidents causing family loss

Managing Risks

  • Timely precautions can prevent certain losses
  • Some losses and damages are the businessman's burden, or shared with others
  • Possibility of loss can be divided into uncertainties and risks
  • Uncertainties are unforeseen events
  • Risks can be anticipated from past experiences
  • The chance of fire or theft depends on precautions and preparedness

Mitigation

  • Adequate preparation is needed to minimize the effects of the risks when they occur
  • Everyone should think of future needs if they are unable to work due to old age or illness
  • Illness may occur more often with age
  • Death may happen when there is a family to care for

Transportation Risks

  • Goods transported from place to place may face from accidents that can cause damage or loss
  • Trains derail, bridges collapse, or planes crash due to engine failure
  • Trucks can be looted on route to another city
  • Ships can be damaged when loading or unloading at ports
  • Insurance allows the sharing of these damages or losses

Business Objective

  • Earning a profit should be the most important objective of every business
  • Lack of profit reduces capital
  • Businesses should aim to be efficient
  • Declining sales of goods may be a warning sign
  • If reasons for lower sales are identified, remedies can be applied
  • Losses may occur from market shift, loss of income, or accidental fire
  • Workers striking may cause losses
  • Risks are the possibility of loss or damage from circumstances a business has little or no control over

Types of Risk

  • Speculative Risk involves business judgment based on speculation such as change in fashion or government policy
  • Pure Risk means the chance of loss is predictable
  • Property Risk involves the loss of property
  • Personnel Risk involves life or health of human beings
  • Financial Risk involves financial transactions of the business
  • Marketing Risk involves the marketing of goods

Insurance Basics

  • Insurance shifts the risk of loss or damage to another party/insurer in exchange for a premium
  • The insured's risk is transferred to the insurer which is generally an organization (Insurance Company)
  • The insurer shares the loss or damage
  • An insurance contract involves the insurer paying the insured a fixed amount for a fixed premium
  • Payment occurs upon an event, such as reaching a certain age or death
  • It can also compensate for actual loss from causes mentioned in the contract

Insurance as Cooperation

  • All insured parties who are subject to a risk pay a premium
  • If there is loss or damage it is then compensated to the insured
  • A large number of parties exposed to risk, but only a few suffer loss in a period
  • The insurer (company) spreads the actual losses suffered by a few insured parties among all insured parties

Importance of Insurance

  • Insurance spreads the effects of loss or damage; giving the insured party sense of security
  • Premium periodically creates assurance of fixed amount upon retirement, or security for family in the event of death
  • Insuring risk of loss is also beneficial for businessmen
  • Insurance plays an important role with large-scale production and distribution both nationally and internationally
  • Token amounts assure compensation against a loss in the future
  • Trading and industrial enterprises are aided with huge investments in properties, plants, raw materials, etc
  • Accumulation of savings enables the the funds to be invested in securities issued by big companies and the Government
  • Life insurance encourages individuals to save a part of their current income to cover the risks of old age and death
  • Insurance employs people directly at offices nationwide, while some earn money as insurance agents

Insurance Types

  • Life Insurance and Fire Insurance are the basic forms
  • There is also Marine Insurance and insurances for burglary and motor vehicles
  • LIC was recently the only organizations in India engaged in this work, it now has private sector sectors assisting

Life Insurance

  • Undertakes sum payments on death or after a number of years of the insured
  • Can be paid in a lump sum or periodically
  • Is referred to as life assurance since it has certain risks to happen
  • Involves payment of a fixed sum on a fixed date or on the happening of an event
  • Written contract is known as life insurance policy
  • Group insurance can be for all employees, developing loyalty, and security for raising loans
  • Whole-life policies run for the whole lif, with the sum assured payable to heirs upon death
  • Endowment policies run for a limited period or to a certain age; sum becomes due on the date or death

Fire Insurance

  • Insurer covers compensation for loss or damage suffered by defined matter being damaged or destroyed by fire
  • The claim depends on actual fire, and accidental not intentional fire
  • The cause of the fire is immaterial, there is a principle of indemnity
  • Involves compensating as much as subject to the maximum policy
  • A profit cannot be made from taking fire insurance, only an extent of the loss

Marine Insurance

  • An agreement by the insurer agrees to protect the owner of a ship or cargo against sea risk
  • Insurance includes ship, cargo, and freight
  • Marine insurance covers the loss of cargo by storm (aka cargo insurance)
  • Ship owners can insure it againist loss on account of perils
  • Subject of ship insurance is known as hull insurance, and shipping companies can insure risk of loss of freight
  • Marine insurance contracts are contracts of indemnity

Marine Insurance Types

  • Time Policy insures the subject matter for a specified period of time (usually one year)
  • Voyage Policy is meant for a particular voyage without time consideration
  • Mixed Policy insures the subject matter on a voyage for a specified time

Insurance Differences

  • The amount insured/actual loss is compensated for Fire Insurance and the purchase price is compensated for Marine
  • Compesation is specific amount in Life Insurance
  • Fire and Life insurance policy can not be assigned while life can be
  • Object of Fire is to cover fires, marine covers the sea and life invests
  • Unlike the others Life insurance can be surrendered

Other Types of Insurance

  • Motor vehicles Insurance covers vehicles-passenger cars, vans, commercial vehicles, motor cycles, scooters, etc.,
  • Risks that can occur include accidents, theft, third-part liabililty
  • Third party risk insurance is compulsory under law

Other Insurances

  • Burglary Insurance covers losses from robbery and theft by house break ins
  • Fidelity Insurance protects against losses from dishonesty or embezzlement
  • Personal accident and sickness Insurance policies can be taken out against death during travel
  • Liability Insurance covers risk of liability for injury or death, which can involve employee safety
  • Property Insurance covers a wide variety of items from goods in transit or in store to building or contents

Principles of Insurance

  • Honesty and trust must occur
  • Withholding invalidates the contract
  • Insured must be trustworthy, exclaiming any life-threatening information

Financial interest

  • Financial interest depends
  • Must have it at the time of taking the policy and fire insurance must exist
  • The insurer will only pay the damaged amount
  • In insured property there must be a personal loss
  • Insurance can not cause profits

Other Principles

  • The same subjects can be insured with other insurers
  • Insurance protects all amounts even from separate insurers
  • Subrogation means if the insurer has compensated for damage, they should reserve all the rights to the matter of the products involved for compensation

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