Risk Management with Insurance
Many things are managed in life, such as emotions, time, money, talents, and of course, taxes. One thing that financial planners help their clients manage is risk. There is a potential for significant financial loss if the concepts of risk management are ignored. It would be truly pathetic to see a client’s hard-earned net worth fall apart because of improper risk management.
Obviously, it is impossible to plan for every potentially damaging situation. However, there are categories under which loss can be defined and quantified: death, disability, health, accident, casualty, and liability. It is in these areas that planners must operate.To manage risk, there first must be an awareness of it. The type of loss must be definable and manageable. Second, the magnitude of a risk must be known, as well as the degree and extent of potential damage. How costly can it be? Third, various methods of managing risk must be reviewed to determine which are most appropriate.
The ultimate goal, of course, is to control risk. If control is impossible, then determining the best way to manage risk is essential. The following techniques help clients reduce the risk of loss.
Avoid Risk Refraining from doing certain things can minimize risk significantly.
Reduce Risk Clients can lessen risk by taking specific precautionary steps.
Retain Risk Full responsibility for a loss is assumed. This is the concept behind self-insurance where people use their own funds to cover any loss rather than purchasing insurance for insurance liability. Caution must be exercised when utilizing this technique, because inability to pay for the loss could be disastrous. Also, the potential frequency of loss must be considered to determine whether this technique is feasible.
Transfer of Risk In this instance, the risk is shifted to another. This frequently happens when waivers of liability are signed, for example when going on a rafting trip or for children on a Scouting expedition. However, the most frequent method of transferring risk is to purchase insurance.
Insurance minimizes or eliminates a financial loss due to the uncertainty of future events. However, not all risks are insurable.
