Small to medium businesses are exposed to risks on a daily basis. The impact of these risks could cause a decrease in
revenue and/or an increase in expenses. As we all know, every business is subject to risks at any time. The potential losses as a result of unmanaged risks could be catastrophic. As discussed in the unit lesson, insurance policies can be purchased that can help protect businesses from risks caused by certain events and from risks to their employees’ personal security. BBA 4226, Risk Management .You have been given the task of persuading your business’s board of directors to purchase insurance policies that will help manage the risks mentioned above. The insurance policies have already been chosen, but now you must explain the details of the insurance policies, including the contracts involved in the policies, to the board and convince the board that these policies really will protect the business from risks. In addition, you must describe what the terms in the insurance contracts mean and how they can be applicable to each business area.
In order to this, you will need to create a PowerPoint presentation consisting of at least 10 slides, and complete the following tasks:
Define insurance and an insurance policy.
Identify the two basic types of insurance.
Describe how insurance policies can be used to protect the business from risks caused by certain events and from risks
to their employees’ personal security while on the job.
Define the four essential elements of a valid insurance contract: offer and acceptance, consideration, legal capacity, and
Identify the common terms found in insurance contracts that specify exactly what risks an insurer will cover.
Define catastrophe theory and how it differs from risk management principles.
Discuss how catastrophe theory can be utilized by your organizations to manage and recover from risks.
Insurance and Insurance Policy
Insurance refers to a means of protecting businesses from financial loss. In other words, it is a risk management approach whereby businesses protect themselves against loss occurring from uncertainties in the business environment. Insurance occurs when people facing similar risks pool resources together to create a common fund from which compensation can be paid to those who undergo losses. This transfers the risk from the individual to the entire group, making it easier for the group to compensate losses. An insurance policy is a document that provides contract details between the insurance company and the insured. An insurance company issues the policy document to the insured during contract agreement.
Two Basic Types of Insurance
There are two main types of insurance namely life insurance and general insurance. Life insurance is a contract between an insurance company and an individual to transfer financial risks to the insurer in case of premature death of the insured. In turn, the insured makes certain premiums or payments to the insurance company on specified basis. General insurance refers to all other types of insurance other than life insurance.
How Insurance Policy can Protect the Business from Certain Risks
Insurance policies can be used to protect the business from certain risks caused by certain events. One way of protecting the business is by providing compensation in the even that the loss insured against occurs. For instance, a business might take property insurance to safeguard the business in case of accidental fire, damage due to storms, and theft (Madura, 2016). In the event that one of these risks occurs, the insurance company provides compensation to the insured. Businesses can protect themselves from risks to the employee’s personal security by taking workers’ compensation insurance. The workers’ compensation insurance ensures that the employee gets compensation in the result of death, disability, or sickness resulting from his/her work. In case of death of the employee, the insurance company compensates the beneficiaries.
Essential Elements of a Valid Insurance Contract
Offer and acceptance is one of the key element of a valid insurance contract. Offer and acceptance means that the person who wants to take an insurance cover tenders or offers his risk using a proposal form to the insurance company (Gulati, 2007). The insurance company may either accept or decline to insure the risk. The offer may come from the insurer or the insured. Consideration is the amount that the insured pays as premium for the insurance contract to become binding (Gulati, 2007). The consideration may be of any amount. Once the insurance company receives premium, the contract becomes legally binding.
Legal capacity means that the purpose for which the insurance agreement is entered should not contravene the laws of the country (Gulati, 2007). A valid insurance contract is one that does not involve immoral activities, contraband goods, or anything else forbidden under the law. Purpose refers to the specific reason for which the insured takes the insurance cover. There must be a clearly established reason why the insured takes the cover. In addition, the insured must have insurable interest in the thing he/she wishes to insure.
Catastrophe theory is a method for predicting or describing reality (Chen et al., 2012). Catastrophe theory investigates discontinuous catastrophes or changes affecting an organization. Catastrophe theory differs from risk management principles in certain ways. The most important difference is that catastrophe theory investigates discontinuous changes affecting the organization while risk management principles are concerned with the day to day changes occurring within the organization.
How Organizations can Utilize Catastrophe Theory
The catastrophe theory can help in developing computerized models leading to a set of simulated events (Chen et al., 2012). This enables individuals to assess the losses that might occur from particular events. Businesses can also apply catastrophe theory during forecasting. The organization can thus apply catastrophe theory in predicting the risks of loss relating to a particular event. Catastrophe theory can enable a business tell the risk levels of various events and the probability of occurrence of the particular events.
- Booker, J. (2007). Comprehensive practices in risk and retirement planning. Toronto: CCH Canadian Limited.
- Chen, Y., Song, G., Yang, F., Zhang, S., Zhang, Y., & Liu, Z. (2012). Risk assessment and hierarchical risk management of enterprises in chemical industrial parks based on catastrophe theory.International Journal of Environmental Research and Public Health, 9(12), 4386-4402. doi:10.3390/ijerph9124386
- Gulati, N. C. (2007). Principles of insurance management: A special focus on developments in Indian insurance sector – pre and post liberalisation. New Delhi: Excel Books.
- Madura, J. (2016). Financial markets and institutions. Boston, MA: Cengage Learning.