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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 buildings 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 firms 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 executives 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. . 2. , . 3. , , . 4. - . 5. . 6. . 7. , , . 8. , , . 9. . 10. . 11. , . 12. , . 13. . 14. . 15. .

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?

DEVELOPING SPEAKING SKILLS

Task 35. Having read the material of the unit, how would you answer the questions:

Would you like to work as a financial manager? Why?

If you were to buy stocks of some company, what type of company would that be? Comment on your choice.

If you owned a business what kind of loans would you give preference to? Why?

Why is the job of a risk manager becoming more and more popular in modern business world? Would you like to take the job? Why?

 

Task 36. Choose any of the dialogues offered below. Reproduce them with a partner. Change the roles. Single out the major ideas and be ready to report them to the group.

Dialogue 1.

A: Nowadays people talk a lot about risk management. Would you be so kind as to explain to me some of the issues that I dont really understand about it?
B: Sure, no problem. Actually I specialise in this sphere of management, so Ill be very glad to help you in any way.
A: The first thing that interests me is the description of the risk management itself. Does every company describe it in the way that seems more convenient and understandable for them?
B: Of course not. Even though risk management is a rapidly developing discipline and there are many and varied views and descriptions of what it involves, how it should be conducted and what it is for, there already exists a certain standard in this.

Dialogue 2.

A: I am interested in the risk management standard. Do you know, who worked this standard out?
B: The risk management standard is the result of work of a team of specialists from the major risk management organisations in the UK The Institute of Risk Management, The Association of Insurance and Risk Management and ALARM The National Forum for Risk Management in the Public Sector. The standard also used terminology for risk set out by the International Organisation for Standardisation (ISO).
A: I see, and what does this standard include?
B: The main issues that the standard deals with is terminology related to the words used, process by which risk management can be carried out, organisation structure for risk management and objectives for risk management.

Dialogue 3.

A: I wonder who should identify risk. Are there any companies dealing with this kind of services or should every company have its own specialists?
B: Well, you see, risk identification can be carried out by outside consultants, but an in-house approach is likely to be more effective. The main aim of risk identification is to identify an organisations exposure to uncertainty which requires an intimate knowledge of the organisation, the market in which it operates, the legal, social, political and cultural environment in which it exists, as well as the development of a sound understanding of its strategic and operational objectives, including factors critical to its success and the threats and opportunities related to the achievement of these objectives.
A: Who should the company report the results of risk identification to?
B: They should be reported both internally and externally. I mean the board of directors, business units and individuals within the company and stakeholders outside the company. The only difference is that all of them need different types of information.
A: Well, this all sounds really interesting. Do you think I could find more information in some books?
B: Of course, if you come to my office Ill give you the list of the best publications on the topic and answer your questions.
A: Thank you so much. I appreciate it. Good-bye!
B: Good-bye!

 

Dialogue 4.

A: Oh, hi! Its been long time since I saw you last. How are things with you?
B: Hello! Not bad. Im so glad to see you. I really hope youll be able to help me.
A: Ill do my best, of course. Whats your problem?
B: You see, now that Im finishing the third year of management studies I have to choose a more particular specialisation. And Im really not sure which one is the best.
A: Well, the thing is that I cant give you any piece of advice, as it has to be your own decision. What you need to do before making a decision is to find out as much as you can about different particular specialties in management. As I study financial management I can tell you some things about it.
B: That would be great! Thanks.

 

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