The 4 Risk Management Techniques

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Here are 4 ways you can go about managing risks

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From business owners, young professional or high net worth individuals we all encounter different risks throughout our daily lives.  The most top of mind risk right now is becoming infected with the Coronavirus and the negative effects that can have on you and your family.  Risk management is a term that is thrown around a lot in the financial world. I oftentimes find this term to be confusing to most because of the wide variety of products and solutions.  The first step in this process is to identify the risk some common examples include: death, injury, loss of income or loss of wealth. Below I will outline the 4 types of risk management strategies, the strategy that is most concerning is the unintentional risk retention. One may consider these your financial “blindspots” It is best to be aware of risks you may or may not be taking and then determine which risk management technique you should apply.    

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  1. Risk Avoidance – this is simply not doing the things that will expose you to a particular risk. If someone is worried about getting into a car accident they can avoid driving.  Worried about coming in contact with someone that may have Covid 19, shelter in place, use delivery or other resources to obtain the things you need.  Risk avoidance is not always feasible, giving up driving or completely sheltering in place may not be an adequate solution for most.

2. Risk Minimization – this is the strategy used to reduce the likelihood or severity of loss caused by a particular risk.  Wearing a seatbelt while driving and ensuring your automobile has had all the proper tune ups are examples of risk minimization strategies. Wearing a mask in public is also an example of a risk minimization strategy.

3. Risk Transfer – this occurs when an individual or entity passes on the risk to an outside 3rd This is the process of purchasing an insurance policy.  By utilizing health insurance, life insurance or long-term care insurance you are passing that risk onto an insurance company and removing that responsibility.  Home, auto, life and property insurance are common examples of a risk transfer strategy.  There is obviously a cost to transferring your risk, examining if it is more economically beneficial to pay for that protection or pay for the consequences of that risk are something you will need to determine.   

4. Risk Retention – this is the strategy of an individual assuming the risk themselves. This may be intentional or unintentional. This is the process of taking no steps to avoid, minimize, or transfer the risk.  This occurs when the potential for loss is unlikely or the cost of the loss is small relative to an individual’s overall assets.  As mentioned, this may be an unintentional occurrence. There are several examples of how this takes place. This may happen gradually overtime as someone accumulates wealth and valuable possessions and does not update their home insurance policy. This may also happen when families have children and do not purchase an insurance policy. 

 

 

The greatest of these 4 risks is risk retention, or your “blindspots.”  It is important to do a regular check up on your personal, family and business situation to see if there are risks that you are unintentionally taking. In my next post I will help you to identify what certain risks you may have as an employer or high net worth individual. From there we can examine which strategy you can apply.   

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