Chapter 14 Business Quiz

Insurance policy

Defines the types of losses that are covered, amount of coverage in dollars, and other conditions to which the two parties agree

Insurance

Financial service used to protect against loss

Market risk

Potential that the target market for new goods or services is much less than originally projected

Claim

Process of documenting a loss with the insurance company

Risk management

Process of evaluating risk and finding ways to minimize or manage loss

Product liability insurance

Protects against financial losses due to a product defect that may cause injury to the user of the product

General liability insurance

Protects against financial losses that result from legal issues

Professional liability insurance

Protects service-based businesses from financial losses caused by errors and negligence in a how a service is provided

Explain the role of insurance companies in managing risk

Risk is a factor in all types of businesses. The fact that a business operates every day is a risk. A business that wants to stay in operation must be prepared for potential losses that might occur. Businesses can buy insurance to protect against specific types of financial losses

Explain the concept of risk management

Risk management is the process of evaluating risk and finding ways to minimize or manage loss. Businesses are liable for their risks. Liable means responsible. When discussing the damage and responsibility related to risks, liability means legal responsibility for actions and costs

Explain how businesses can self-insure

A business may choose to self-insure by saving money to cover the financial losses of some risks. One way to self-insure is by setting up a bank account specifically for this purpose. Money can be deposited into the account each month to cover a future loss.

Economic risk

A situation that occurs when business activities suffer due to changes in the US or world economy

Deductible

Amount the insured is responsible for paying when a claim is made

Premium

Amount the insured pays for the insurance coverage

Differentiate between controllable and uncontrollable risks

Controllable risks are situations that cannot be avoided, but can be minimized by purchasing insurance or creating a risk management plan. Uncontrollable risks are situations that cannot be predicted or covered by purchasing insurance

Identify and describe types of liability insurance that a business might purchase

General liability insurance = protects against financial losses that result for legal issues Product liability insurance = protects against financial losses due to a product defect that may cause injury to user of the product Professional liability insurance = protects service-based businesses from financial losses caused by errors and negligence in how a service is provided Commercial insurance = insurance that protects commercial property from risks, such as fire, theft, and natural disaster

Commercial insurance

Insurance that protects commercial property from risks, such as fire, theft, and natural disaster

Describe the four basic types of risk

Natural risk = a situation caused by acts of nature Economic risk = a situation that occurs when business activities suffer due to changes in the US or world economy Market risk = the potential that the target market for new goods or services is much less than originally projected Human risk = a negative situation by the actions of people

Human risk

Negative situation by the actions of people

Businesses can take actions to manage identified risks. Name and describe these four options that management can take

One of the first steps in risk management is to assess the risks, and determine if they can be avoided. Avoidance is taking steps to eliminate risk. Reducing is a risk strategy of minimizing risks that cannot be avoided. Some risks can be transferred so that the owner shares the risk with others. Insurance is the most common way of transferring risk. Insurance is a financial service used to protect against loss. Unfortunately, insurance may not be available to cover all the risks a business identifies. An uninsurable risk is one that an insurance company will not cover. In this case, businesses must assume the full risk.

Natural risk

Situation caused by acts of nature

Controllable risk

Situations that cannot be avoided, but can be minimized by purchasing insurance or creating a risk management plan

Uncontrollable risk

Situations that cannot be predicted or covered by purchasing insurance

What types of insurance are required by law for businesses to provide for their employees?

Workers' compensation insurance = covers medical expenses and lost wages for employees who are injured at work Unemployment insurance = provides certain benefits to workers who have lost their jobs through no fault of their own Disability insurance = provides some financial income to employees who become sick or injured due to a nonwork related event or condition