INTRODUCTION

Business Risks In the pursuit of any objective, one has to reckon with risk. Individuals and firms must face the prospect of either gaining or losing in their investments. For every transaction made, a corresponding amount of risk is present. Yet, even with such uncertainties, businesses move on. One can only imagine the ill effects on the economy once the firms decide to cease operations for fear of obtaining losses.

DEFINITION OF RISK Risk may be defined in two ways. First, it may be viewed as the variability in possible outcomes of an event based on chance. Thai is, the greater the number of likely different outcomes that may occur, the greater the risk will be. Examples of no-risk or low-risk investments are those made for the purchase of government bonds. Conversely, if an investor knows that he will surely lose in his investments; there is also no risk involved. Risk also refers to uncertainty associated with an exposure to loss.

METHODS OF HANDLING RISK Experiences have led mankind to adopt ways of handling risk. The methods are more pronounced when applied to business finance. These methods are the following: 1. Risk may be avoided; 2. Risk may be retained; 3. Hazard may be reduced;

4. Loss may be reduced 5. Risk may be shifted; and 6. Risk may be reduced.

A businessman, who wants to avoid the risk of losing his building to fire, may do so by simply avoiding the ownership of one. In fact, there are ways of avoiding risk. One of them is through leasing. There are instances when risk cannot be avoided. They are simply retained. As not all properties are good objects of lease agreements, the ownership of some cannot be avoided. The risks inherent to ownership are, then, retained. An example is the unavoidable ownership of small items like pencils and ball pens. Hazards are those conditions that create or increase the chance of loss. An unlighted stairway is a hazard that may cause accidents in a factory. Potential losses may be reduced by providing suitable lighting along the stairway. When losses happen, some action may be done to minimize such losses. When car accidents happen, injuries to the driver and passengers may be reduced by the use of seatbelts. When buildings are physically separated, the chance of losing all the buildings in the event of a fire is minimized. Big corporations prohibit their key employees from traveling in one group and boarding the same plane. The reason for this is obvious. The firms do not want to lose their key personnel in one unfortunate event. Hedging, contracting, the use of surety bonds, incorporation, and insurance are examples if shifting risk to other party. Effective managerial control trends to reduce risk. Examples are materials control systems, audits and other accounting controls, and process and product inspection plans.

RISK HANDLING METHODS

Avoidance

Retention

Risk Shifting

Risk Reduction

Hazard Reduction

Loss Reduction

Hedging

SubContracting

Insurance

Surety Bonds

Incorporation

Life

Non-Life

Fire Marine Motor Car Liabilty Crime Glass Boiler and Machinery Credit

INSURANCE AS A DEVICE FOR HANDLING RISK

The most common device used in handling risk is insurance. Most risks that are related to business operations may be covered by insurance policies currently sold in the market. In spite of this, however the Filipino businessman is not very keen in availing of the services provided by insurance firms.

INSURANCE DEFINED Insurance may be defined in various ways. From the legal viewpoint, a contract of insurance is an agreement whereby one undertakes for a consideration , to indemnify another against loss, damage, or liability arising from an unknown or contingent event. From the viewpoint of business economics, insurance is an economic device used to reducing risk by combining a sufficient number of exposure units to make their individual losses collectively predictable. THE INSURANCE POLICY The insurance policy is the written instrument in which a contract of insurance is set forth. It contains the following: 1. Declarations; 2. Insuring agreements; 3. Exclusions; and 4. Conditions

Declarations. The nature of the risk is described in the declarations which are usually found on the first pafe of an insurance policy. Information related to the following are included.

1. Subjects covered, such as machinery and installations in a fire policy; 2. Person or persons insured, such as Mr. Roberto Montivirgen or Mr. and Mrs. Rodolfo Padua. 3. The premium to be paid which includes all or some of the following: a. The rate of premium expressed in percentage; b. The amount of premium; c. The amount of documentary stamps payable; d. The amount of premium tax payable; and e. The amount of fire service tax payable (applicable to fire policies). 4. The period of coverage, such as 12 noon, june 7, 2005 to 12 noon, june 7, 2006. 5. Policy limits or amounts of insurance, such as ONE MILLION PESOS (Php. 1, 000, 000.00) PHILIPPINE CURRENCY; and 6. Warranties or promises made by the insured with respect to the nature and control of the hazard, such as Non- Hazardous Chemistsand Druggists Warranty. Insuring Agreements. The insuring agreements is that part of the policy which states what the insurer agrees to do and the major conditions under which it agrees. The insurer promises to compensate the insured if a loss under the insured peils occurs and if the insured meets the conditions of the contract. The insurer has no obligation to pay if the conditions are not met. The insuring agreements in a personal accident policy, for instance, usually include the table of benefits, provisos, and general conditions.

Conditions. Conditions may be general or specific. The general conditions usually cover the following: 1. Conditions or payment of premium;

2. Notices required; 3. Evidence of loss; 4. Cancellation; 5. Short - period rate scale; 6. Arbitration clause; 7. Agreement on the effect of legal provision on extra ordinary inflation; 8. Omnibus clause; 9. Important notice; 10. Action or suit clause; and 11. Settlement clause. Exclusions. An exclusion is a provision or part of the insurance contract limiting the scope of coverage. Exclusions comprise certain causes and conditions listed in the policy which are not covered. Death and disablement due to war and invasion, for example, are excluded in the risks covered by a personal accident policy. TYPES OF INSURANCE COVERAGES Life coverages are those relating directly to the directly to the individual. The risk covered is the possibility that some peril may interrupt the income that is earned by an individual. The peril relating to the life coverages consist of the following: 1. death; 2. accidents and sickness; 3. unemployment; and 4. old age.

Insurance is written on each of the four perils. Non-life Coverages

A non-life coverage refers to insurance other than life. Included in non-life coverages are: 1. Fire and allied risks; 2. Marine; 3. Casualty 3. Surety; and 4. Liability. Non-life insurance is distinguish from life insurance in that life insurance in that life insurance covers perils that may prevent one from earning money with which to accumulate property in the future, while non-life insurance covers property that is already accumulated. Non- life insurance is also referred to as general insurance. BASIC TYPES OF LIFE INSURANCE CNTRACTS There are quite a number of life insurance policies which are offered for sale in the market to meet the varying needs of individuals and business firms. All are whole life, term, or endowment, or a combination one or more of these. Such combinations include annuities, since they form part of the life insurance business. This condition makes life insurance contracts into four basic types: 1. Whole life; 2. Term; 3. Endowment; and 4. Annuities

Whole Life Insurance

Whole Life Insurance is a kind of life insurance which is kept in force until death so long as premiums are paid, regardless of age and the time period. It is a permanent form of insurance and covers the insured for life. The phrase covers the insured for his whole life is a basis for naming this particular kind of insurance contract. Classes of Whole Life Insurance. Based on the method of premium payment, there are three classes of whole life insurance policies: (1) single-premium; (2) continuous-premium; and (3) limited payment policies. Single-premium whole life policies are those for which, in exchange for one premium, the insurer promises to pay the claim whenever death occurs. Continuous- premium whole life policies are those for which the insured pays the same premium amount continuously as long as he is alive. limited- payment whole life policies belong to the type of insurance plan under which the premiums are paid for a limited period of years, after which no further premium payments need to be made.

Term Insurance A term insurance policy is a contract between the insured and the insurer whereby the insurer promises to pay the face amount of the policy to a third party (the beneficiary) if the insured dies within a specified time period. Term insurance, as its name implies, is insurance for a term, or temporary period. Whole life insurance, in contrast, is permanent insurance and covers as long as the insured lives. Term insurance, when written for a year, provides protection equal to the face value of the face value of the policy for only one year. When written for five years, the coverage is only for five years. At the end of the specified period, whether for one year or five years, the coverage is terminated, and the policy no longer has value. Types of Term Policies. Term insurance policies are classified as follows:

1. Straight term policies which are written for a specific number of years and then automatically terminated; 2. Long-term policies written to terminate at some specified age of the insured , commonly 65; 3. Renewable term insurance which may be renewed by the insured before expiry date, without again proving insurability; 4. Convertible term policies which may be converted into whole life or endowment insurance within specified period, without evidence of insurability; 5. Increasing term insurance, the policy amount of which increases monthly oy yearly; and 6. Decreasing term insurance, the face value of which reduces periodically, either monthly or yearly. Endowment Insurance Endowment insurance is a contract under which the insurer promises to pay the beneficiary a stated sum if the insured dies during the policy term, or to the insured if the policy term is survived. The policy term is also referred to as the endowment period. Types of Endowment Insurance. Endowment insurance may be classified according to the following: 1. The term for which they are written may vary from 5 to 40 years; 2. The designated age of maturity Ito which they are written, such as 60 to 65 years; and 3. The period of premium payment, such as the limited payment endowment, where the endowment is payable at death or at the end of the endowment period. Annuities An annuity is a series of payments made at certain specified intervals. Annuities are written either (1) as separate contracts, on an individual or group basis; or (2) as

supplementary contracts, using the proceeds of a life insurance contract to purchase an annuity benefit. BUSENESS AND THE USE OF LIFE INSURANCE The employees of a firm constitute a very important investment. Possible liabilities of the company may arise when employees are injured or killed in work-related accidents. The moral obligation of the employer is to provide for such type of needs. If these are not provided for through insurance, the funds of the firm which are earmarked for other uses,may be jeopardized. The various types of life insurance contracts available provide solution to such possible difficulties. FIRE INSURANCE Fire is one of the most destructive perils know to man. It kills people and it destroys properties. As people and properties are important business resources, some device must be used to protect both. News report abound about properties and lives lost due to fire.

Perils Covered A fire insurance contract covers all direct losses and damages by fire or lightning and by removal from premises endangered by fire. In the attempt to rescue property, losses due to theft may occur. Such losses are also covered by the fire policy. Other allied perils may be covered in a fire insurance contract, provided they are specifically named in the policy. The allied perils refer to the following: 1. 2. 3. 4. earthquake fire; earthquake shock; windstorm, typhoons, and flood: riot and strike damage and riot fire; and

5.

explosions.

What May Be Insured Fire insurance contracts are designed to cover any of the following: 1. building; 2. contents of the building like machinery, appliances, furniture and fixtures, stock-in-trade, and others; or 3. both building contents.

MOTOR CAR INSURANCE Most business cannot avoid the ownership of motor and vehicles. Conveyances are needed by the firm for transporting goods and persons. Its executives will need cars in the performance of their assigned jobs. Products need to be delivered to customers. Supplies need to be fetched from where they were bought. Employees need to be transported from their homes to their place of work and vice versa. All these need will require the firm to own motor vehicles. Owning a vehicle , however, entail some risks inherent to some undertakings. These risks include possible injuries to persons or damage to properties. Fortunately, insurance policies may be bought to cover such risks. Motor Vehicle Insurance Coverages The types of insurance coverage applicable to motor car are the following: 1. Compulsory Third Party Liability (CTPL); 2. Third Party Property Damage (TPPD); 3. Passenger Liability (PL); 4. Own Damage (OD) and theft; and

5. Personal accident coverage for drivers and passengers of private and commercial vehicles. Compulsory Third Party Liability. The compulsory third party liability (CTPL) insurance covers loss or damage inflicted upon third parties owing to the use of a motor car. Loss or damage refers to pedestrians or passengers of other vehicles who may be killed by a vehicle driven by a person. CTPL provides for death benefits, burial, and hospitalization expenses amounting to a maximum of Php. 50, 000 depending on the classification of the vehicle. The maximum amount of coverage could be raised provided additional premiums are paid to the insurer. Third Party Property Damage. The use of motor vehicles may also cause damage to property of third parties. This type of loss may be covered by a third party property damage for TPPD could reach more than a hundred thousand pesos. Passenger Liability. Operators public utility vehicles may be held liable for death or injuries inflicted upon passengers. Losses under this type of liability may be covered by passenger liability (PL) insurance. Maximum coverages differ depending on the type of vehicle. Own Damage and Theft. The motor vehicle itself may also be the subject of loss or damage. A brand new delivery truck, for example, may be damaged by typhoon. The firms needs protection from such unwanted physical destruction of their vehicles. Such protection is available through the purchase of own damage (OD) policies. Losses due to theft are oftentimes available in conjunction with the OD cover. Personal Accident. The driver and the passengers of private and commercial vehicles are oftentimes left without protection against accident. Policies may be bought to cover them against such risks.

MARINE INSURANCE Business firms involved in transporting commodities from one seaport toanother require protection from possible losses of such commodities. This type of insurance coverage applicable is called marine insurance. Marine Insurance Coverages Section 99 of the Insurance Code of the Philippines incates what is includedin marine insurance. These are the following: 1. Insurance against loss or damage to: a. Vessels, craft, aircraft, vehicles, goods, freights, merchandise, effect, disbursement, profits, moneys, securities, choses in action, evidence of debt, valuable papers, bottomry, and respondentia interest and all other kinds of property and interest therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation, transit or transportation, or while being assembled, packed, crated, baled, compressed or similarly prepared for shipment, or while awaiting shipment or reshipment incident thereto, including war risks, marine buildiers risks, and all property floater risks. b. Person r property in connection with or appertaining to a marine, inland marine, including liability for loss of or damage arising out of in connection with the construction or repair, operation, maintenance, or use of the subject matter of such insurance. c. Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise. d. Bridges, tunnels, and or other instrumentalities of transportation and communication, piers, wharves, docks and ship, and other aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways.

2. Marine protection and indemnity insurance meaning insurance against, or against legal liability of the insured for loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality in use in ocean or inland waterways including liability the insured for personal injury, illness or death or for loss of or damage to the property of another person. GENERAL LIABILITY INSURANCE Business firms may at times be subjected to liability claims by other parties. Damages paid to claimants are sometimes enough to cause bankruptcy to the firms. To protect the firm from such adverse financial difficulties, some sort of insurance cover is required. Such need is covered by liability insurance policies. Business Liability Forms General liability exposures may be calssified into three broad areas: (1) business liability; (2)professional liability; and (3) personal liability. The first class concerns business and it may covered by business liability forms. These forms consists of the following: 1. Owners, landlords, and tenants form; 2. Manufacturers and contarctots form; 3. Comprehensive liability form; 4. Contractual liability forms; 5. Owners and contractors protective liability insurance; 6. Products and completed-operation liability form; 7. Product recall insurance; 8. Personal injury liability policy; 9. Storekeeper liability policy; and 10. Dramshop liability policy. SURETY BONDS The firms may also be exposed to possible losses involving the following:

1. The mishandling or misappropriation of goods or funds by employees; and 2. The non-performance of a party who has entered into an agreement with the firm. The first type of exposure to loss may be covered by fidelity bonds, while the second type may be covered by surety bonds. Fidelity Bond A fidelity bond is one that covers an employee or employees in position/s of probate trust and it guarantees the employer against loss up to the penalty of the bond should the employee or employees bonded be proven dishonest. Surety Bond A surety bond guarantees the oblige that the principal named in the bond will perform a certain obligation and if he fails to do so, the surety will perform the obligation or pay the damages up to the amount of the bond. Miscellaneous Insurance Lines There aer other types of insurance coverages which may protect the firm from possible financial losses. These are the following: 1. Crime insurance; 2. Glass insurance; 3. Boiler and machinery insurance; and 4. Credit insurance. Crime Insurance \ Crime insurance protects the owners of property against losses due to its being

wrongfully taken by someone else. Crime coverages include possible losses from burglary, robbery, larceny, theft, forgery, embezzlement, and other dishonest acts. Glass Insurance

The large amounts of cash outlay invested in glass used for light, display, and ornamentation exposes the owner to losses which may be substantial. Glass set in display windows is particularly susceptible to destruction. Riots, strikes, runaway cars, and accidental or deliberate breakage by persons are some of the common hazards. The comprehensive glass policy insures against breakage or damage to the glass. Boiler and Machinery Insurance The boiler and machinery insurance is type of insurance contract which provides protection against loss resulting from the accidental bursting or breaking of a great variety of apparatus. Credit Insurance Credit insurance is a contarct whereby the insurer promises, in a consideration of a premium paid, and subject to specified conditions as to the persons to whom credit is to be extended, indemnify the insured, wholly or in part, against loss that may result from the insolvency of persons to whom he may extend credit within the term of insurance.

Credit insurance may be classified into five types, namely: 1. Credit life and credit accident and sickness insurance; 2. Accounts receivable insurance; 3. Domestic merchandise credit insurance; 4. Governmental credit insurance; and 5. Export credit insurance.