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The Need for Risk Management and Insurance in Business Education

Business education involves the development of analytic and communication skills designed to assist organizations in achieving their strategic and operational objectives.  These skills range from the precision of accounting to the creativity of marketing and from the formula driven elements of finance to the concepts and principles of management.

Each of these business disciplines has an important connection with risk.  Each must consider the impact of fluctuations in outcomes with the recognition that such fluctuations involve costs that reduce business value and that can and should be managed.

Risk management is designed to coordinate the efforts of all functional areas within an organization for the purpose of minimizing the adverse effects of risk on business value taking into account the costs of risk reduction.  While each of the other functional areas focuses on the technical aspects of its discipline, risk management views the organization as a system and has the objective of making the system operate consistently with a level of risk that achieves this goal by balancing the benefits and costs of risk and risk reduction.

Risk is an inherent ingredient in any business regardless of the product or service being provided.  The pervasiveness of risk is evident in the following descriptions: natural risks, operational risks, financial risks, employment risks, health risks, political risks, and liability risks.  While the frequency or severity of adverse outcomes from any particular risk will vary with each business, the challenge remains to manage risks to reduce their adverse impact on business value.

Each business must also address risks faced by its individual employees.  Employee benefit programs, including health care plans, life and disability plans, and retirement plans, are a response to these risks and represent a significant cost.  They have a decided impact on the financial strength and competitiveness of the business organization.

Businesses must also address the cost of risks managed by various social institutions and government programs. These include Medicare, Medicaid, unemployment insurance, workers’ compensation insurance, and social security.  A working knowledge of these institutions and programs, as well as the extent of risk and cost shifting to the private sector, is a vital component of understanding the business environment.

Based on the pervasiveness of risk and its manifestation throughout the private and public sectors, the discipline of risk management and insurance should be viewed as an important component of a comprehensive business education.