Text 2. Risk management and insurance

Every day the costs necessary to start up and run any kind of business are increasing. The risk of failure, bankruptcy and financial losses is also increasing. How to manage the problem? Speaking about risk management, one may consider this issue to be the major one among the other business issues. Some years ago the best way to protect against the risk was to buy insurance. Nowadays, insurance is rather expensive cost, thus people in business have to search for the other sources of managing risk.

Risk, in general, refers to the chance of loss, the probability of loss and the amount of possible loss. One may differentiate between speculative risk and pure risk. Speculative risk involves a chance of either profit or loss. An enterprise may earn additional funds through buying new machinery, considering options, making decisions to decrease the probability of loss. One takes speculative risk on the chance of making a profit. Pure risk is defined as the threat of loss with no chance for profit. Business firms deal with pure risk very often. To reduce it the firms might self-insure against the risk, avoid the risk or buy insurance to cover the risk. Reducing the risk is possible through purchasing and using safety devices to protect employees from possible accidents, through providing health education and equipment maintenance programs. Self-insurance guarantees managing amount of loss to those companies that cannot afford conventional property or casualty policies. Firms having huge facilities, find self-insurance a good way out in difficult situation. The chance for risk is always present. Nevertheless, some companies try to avoid risks by not being involved in hazardous activities.

There are two major types of insurance companies: a stock insurance company and a mutual insurance company. A stock insurance company is owned by stockholders, just like any other stock company. A mutual insurance company is owned by its policyholders. It issues participating insurance, meaning that any excess profits go to a policyholder or investor in the form of dividends.

Insurance policy stands for a written contract between the insured individual or institution and the insurance company itself that promises to pay for all or part of a loss. The law of large numbers says that if a large number of people or organisations are subject to the same risk, a predictable number of losses occur over a given period of time. As soon as an insurance company determines these figures it can determine the premium (the fee charged by an insurance company) which might be rather high as to cover possible losses. Rule of indemnity states that an insured person or organisation cannot collect more than an actual loss from an insurable risk. Coinsurance clause requires businesses to perform insurance equal to a certain percentage of a building’s actual value. A deductible clause explains that the insurance company has to pay only the part of a loss exceeding a figure in a policy.

There is a list of insurance policies, a firm can buy: 1) fire (insures from fire, theft, different natural disasters); 2) auto and truck (insures from property damage, collision, bodily injury, theft, vandalism etc.); 3) marine and aviation (insures boats, planes and their cargo); 4) liability (insures from legal claims from the firm’s products or operations); 5) workers compensation (protects from injuries sustained on the job); 6) criminal loss (insures from theft and losses while breakings); 7) credit (covers from non-payment by consumers); 8) business interruption (insures from the firm being closed); 9) health (it is a firm who pays the cost of employees’ insurance); 10) life (protects against the loss of key executives and employees); 11) farm insurance (protects property and liability risks on farms).

Most attention should be paid to life insurance presupposing insurance for executives and employees. Some life insurance plans include group life insurance, owner or executive insurance and retirement and pension plans. Rates for group insurance are lower than for individual one which saves a lot of money. An owner insurance enables the firm to pay off bills and keep on with performance in the case of an executive’s death. It also guarantees a safety of a job for employees. Retirement plans should provide employees with the ability to get financial support after retiring from a job.

Risk management has become one of the most important and dynamic functions in business. People who deal with the risk and compile appropriate plans and efficient programs to cover the risk at a minimum cost are referred to as risk managers. The future career development is huge. Life insurance market has a great potential, because insurance companies appear and broaden day after day and demand insurance agents. These financial advisors sell mutual funds together with insurance policies.

Another job one may occupy in risk management is insurance adjuster. It stands for a person who calculates the extent of a loss. These people come, estimate the losses and state the sum of money to be reimbursed. Actuary representing the other profession in the sphere of risk management predicts future possible losses on the basis of historical data.

There are many careers in risk management proposing versatile opportunities to get into business. Try one and reach for success.

Task 33. Translate the sentences into English:

1. Бізнесмени намагаються знайти ефективні способи подолання ризику. 2. Ризик визначають як реальну можливість втрат, а також як загальну суму цих втрат. 3. Ризик можна подолати, купуючи страхові поліси для своїх підлеглих, тим самим захищаючи їх від можливих нещасних випадків. 4. Будь-яка справа може бути ризикованою. 5. Деякі компанії намагаються уникати ризикованих справ. 6. Власниками акціонерної страхової компанії є акціонери. 7. Письмова угода між застрахованою особою або установою і, власне, страховою компанією називається страховим полісом. 8. Існує багато різних страхових полісів, які фірма може придбати, щоб застрахувати себе від ймовірних втрат. 9. Кредитний страховий поліс захищає фірми від несплати необхідних коштів споживачами. 10. Медичне страхування забезпечує якісне і вчасне медичне обслуговування застрахованої особи. 11. В наші дні страхування є порівняно дорогою, але дуже необхідною справою. 12. Бажано застрахувати власний бізнес, щоб уникнути банкрутства. 13. Власники полісів є власниками спільної страхової компанії. 14. Пенсійні плани забезпечують людей фінансовою підтримкою. 15. Страхування власника компанії гарантує підприємству безпечне існування у разі смерті власника.

Task 34. Think over and then write for half an hour on one of the following issues:

A. Do you agree or disagree with the following statement: the role of financial managers is crucial in a success or a failure of a business? Use specific reasons and examples to support you answer.

B. Have you or your family ever used insurance services of any insurance company? If you have no personal experience, ask your acquaintances about their experience of using such services and describe what you have learnt.

C. What risks are businesses faced with and how can businesses insure themselves against these risks?