Pure Risk, Risk Management, and the Principles of a Sound Insurance Program

Managing Risk in Small Business
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Managing Risk in Small Business
A risk in business refers to the possibility of a firm not meeting its expected goals because of some uncertainties. There are different types of risks and two of the common ones include pure risk and speculative risk. While a speculative risk entails the price uncertainty and potential for losses in investments, pure risk is the potential for an organization to register losses where there is no potential for any gain.
Types of Pure Risks
There are three basic types of pure risks: personal risks, property risks, and liability risks. Personal risks are those that directly affect an individual’s potential to earn some income. These risks can include premature death, old age, sickness or disability, and unemployment. Property risks are the potential for losses associated with property. People may suffer from property risks through damaged or lost property. Liability risks are those that arise of intentional or unintentional injuries to people or damages to their property out of carelessness. This type of risk often arises from law, such as liability of an employer towards their employees.
Risk Management
Risk management refers to the process of identifying, assessing, and mitigating the threats to a firm’s strategy. These threats can arise from various sources that include economic turmoil such as the global depression, legal liabilities, errors in strategic management, and natural calamities. Most of the successful businesses have an elaborate risk management strategy that they use to avert potential risks. By conducting the risk management, the organizations ensure a safe and secure working environment, better stability of business operations, better environmental protection, and protection of the people from harm.
Risk management can be applied to a small business by undertaking four key steps. These include risk identification, risk assessment, risk management, monitoring and review. In risk identification, one has to review the business and identify potential risks. Risk assessment entails evaluating each risk identified to determine its likelihood of occurring and the consequence if it occurred. Risk management entails development of appropriate cost effective strategies to manage them. One can avoid, reduce, transfer, or accept the risk depending on his or her assessment of the potential impact it will have on the business. Under monitoring and review, the entrepreneur should constantly check and review the risk management plan to ensure that the control measures are updated.
Basic Principles of a Sound Insurance Program
A sound insurance program is a priority for any firm or individual worried about the risks that their company faces. As different companies explore the major strategies that guarantee a sound insurance program, there are five basic principles of such a system. First is probability, which refers to the likelihood that the insured person will reimburse the amount. The second principle is that the insured must suffer a loss. This phrase means that the insured needs to have an item to be insured and should have the potential to suffer a loss. Thirdly, the indemnity m...