Risk Management Strategies

The information on this website is general in nature and does not take into account your objectives, financial situation, or needs. Consider seeking personal advice from a licensed adviser before acting on any information.

Volumes have been written about risk management, but it all comes down to four simple options and the thought you put into implementing them. When faced with risk you can AVOID it, MITIGATE it, RETAIN it, or TRANSFER it.

Avoidance involves electing not to accept the risk.

For example, if you are no longer comfortable with the additional risk you created by buying a trampoline, avoid this risk by giving it away to your sister-in-law.

Mitigation involves taking steps to reduce the likelihood or severity of a loss.

Expanding on the trampoline example above, you have now decided to keep the trampoline. However, you have decided to take a few actions to reduce the chances someone will use it without your permission and do a few things to make it a safer toy.
 
First, you put a lock on your back gate limiting access to the trampoline (reducing the likelihood of a loss). Then, you spend a few thousand dollars buying padded mats and spreading them around the trampoline (reducing the severity of a loss).

Retention of risk is accepting the chance of a loss.

If you do not insure your car, then you have decided to retain the risk and accept all the consequences of the loss. A more prudent use of retention is the deductible on most property policies.

Transfer of risk takes place through the use of contracts.

A hold harmless agreement is a contract stating that one party will not sue another.

However, the most common form of risk transfer is an insurance policy. Insurance policies are contracts where one party (the insurer) assumes the risks of another (the insured) in return fora 'premium' payment.

A word of caution on risk transfer through and insurance policy.

Virtually all insurance policies have coverage limits (the insurance company's version of Retention and Mitigation) so make sure that you purchase limits that are appropriate to your situation.

An insurance agent who represents more than one insurance company or a professional Risk Manager are in the best position to advise you on what limits are appropriate for your situation.

By using a little common sense and putting thought into which risks and how much risk you are willing to accept you can better protect yourself, your family, or your business from many of the perils that life throws at you.

Properly applied, these techniques can even help you save money on your insurance premiums.

Also in this issue

• The Funnier Side of Insurance
• How to Make Financial Decisions
• Financial Planning When You Have Children
• Free eBook Download

Published: Thursday, 6th Sep 2007
Author: 49