Personal risk management is a subject very commonly related with insurance, though the scope of it goes far beyond life insurance or general insurance policies available to individuals. Insurance is but only an important part of your personal risk management. There are different approaches to managing risk and it is in our interests that we know and understand them.
Risk management is the identification, assessment, and prioritization of risks (de fined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events [1]or to maximize the realization of opportunities. Risk management's objective is to assure uncertainty does not deflect the endeavor from the business goals.[2]
Risk Avoidance:
Risk avoidance is the first important method of risk management. Risk avoidance is the elimination of hazards, activities and exposures that can negatively affect an our health, well-being and assets. In other words, it deals with eliminating any exposure of risk that poses a potential loss i.e. not doing something that carries risks.
Depending on the circumstances, we may have opportunity to completely or partially avoid risks or not to avoid it at all. A change in our behaviour and attitude by becoming more cautious, careful and diligent can help use avoid most of the risks in our lives. The following examples will make things more clear...
Avoiding Accidents:
Following traffic rules, not over-speeding, wearing seat belts /helmets, knowing your body limits, avoiding adventure sports, always using proper safety gear, etc.
Avoiding bad Health:
Not smoking or drinking, taking regular medical tests, exercising regularly, eating properly, etc.
Avoiding damage /loss of Assets:
Using safe lockers at home, keeping valuables in bank lockers, using strong locks in shops, keeping re extinguishers handy, installing CCTV cameras, etc.
Risk Reduction:
Risk reduction refers to the precautions you can take to reduce the amount of loss in the event of the risk materializing into one. Risk reduction is a step that logically comes after risk avoidance where you are not able to avoid the risk completely. There are different methods of reducing risk for eg. Reducing the risk exposure Spreading /diversifying the risk Making a contingency fund ready for an event Being prepared with proper post event situation/actions Reducing costs /expenses in treatment/ rehabilitation Hedging the risk by doing something that will pro t when event occurs
Risk Retention:
Risk retention involves accepting the loss from a risk when it occurs. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against like war, flood, etc. Risk retention normally would happen when …
- The risk cannot be transferred or insured.
- The risks are small and losses are nominal in nature.
- Cost of insuring against the risk would be greater over time than the total losses sustained.
- You have the capacity & willingness to bear losses easily
A very common example of risk retention can be found in insurance policies which is known as – Deductible. A deductible means the amount which the policy holder has to bear before the insurance company starts to repay the claim. For eg. In a health policy, of say 5 Lacs, R10,000 is the deductible meaning you will bear claim expenses up to R10,000.
Risk Sharing:
Risk sharing is where you share your burden of risk or loss with others. The most common and effective form of doing so is to buy an insurance policy. Also known as "risk distribution" it works on the logic that the cumulative premium from a group of policyholders is more than enough to cover the losses from all the events happening in that group based on probability. This group of individuals typically carry similar characteristics and probability for the risk happening.
When you buy an insurance policy, the following things have to be kept in mind...
- Understand & compare the policy features & coverage properly
- Know the policy exclusions properly
- Disclose family & past history, habits, per-existing diseases, etc. honestly
- Fill ll the proposal form personally and do not sign an unfilled form
Adopting A Sound Risk Management Approach:
A question now arises as to how you will manage your risks? There is a suggested process to follow if you desire to do this yourself. No doubt, by following the below mentioned process, you will have a much better understanding and awareness of the risks that you carry with yourself while resulting into a situation where your risks are well covered at the least cost possible .
The risk management process is to Identify all the risks you are exposed to in your personal & work life Assess your vulnerability or probability of a risk event happening Estimate the financial loss /damage in case of each event happening Estimate the cost of transferring, reducing or retaining each type of risk Identify the right way to manage each risk type.
