Page 506 - Business Principles and Management

Chapter 18 • Credit and Insurance

and a $1,500 loss occurs, the insurer pays $1,000 and the insured is responsible
for $500 of the loss (the amount of the deductible). If the loss is only $400, the
insured would bear the entire loss, and the insurer would pay nothing.
To reduce their premiums, people often choose to include a higher deductible
in their policy if they can afford to pay the amount of the deductible in case of
a loss. For example, the premium for an auto insurance policy with a $200
deductible may be $850 a year. The premium for a $500 deductible policy may
be $600. Having the $500 deductible policy saves the policyholder $250 a year.
Of course, if there is a loss, the policyholder must pay $500 rather than $200.

CHECKPOINT

What do insurance companies do with the premiums they collect?

Noninsurable Risks

Businesses are also concerned with risks for which there is no insurance. The dis-
cussion below focuses on some of these noninsurable risks.
1. Companies produce products because they expect to sell them. However,
fashions, styles, and product features constantly change. If consumer tastes
change, the business may suffer a loss if it can’t sell its products or it must
drastically reduce prices. A company with a large stock of outdated prod-
ucts not only will have trouble selling the products but will develop a nega-
tive image among consumers.
2. Old buildings, equipment, and technology can also cause customers to
avoid a business. A business that is modern and uses the latest technology
may attract customers away from an established business unless the latter
works to keep up-to-date.
3. Improved methods of transportation may give one type of business an
advantage over another. For instance, private parcel services originally
took a great deal of the parcel business away from the U.S. Postal Service.
The Postal Service now offers Priority Mail, Express Mail, guaranteed
delivery, and other services to try to recapture some of the lost parcel
business. Pickup and delivery services, weekend schedules, and special
services such as packing are all ways that parcel services try to meet cus-
tomer needs better than their competitors do.
4. Changes in the weather can cause serious business risks. For example, a
long winter season may prevent manufacturers and retailers from selling
spring clothing. A rainy summer may slow business at resorts if people
stay home. A lack of rain can result in crop failures for farmers who have
invested large amounts of money in seed, fertilizer, and equipment. A lack
of snow may reduce sales of skis and snowmobiles.
5. Changes in economic conditions present another serious risk. Rising un-
employment rates cause people to be more careful when spending their
money. Higher gasoline prices add to business costs and may cause cus-
tomers to spend less on luxuries. Some of those risks can be overcome
to some extent by studying business forecasts and planning carefully in
anticipation of changes in the economy. Others require an adjustment in
operations to save costs in one area when they are increasing in others.
Therefore, a knowledge of economics and business trends is essential.

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