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Risk Management Techniques

Risk Management Techniques

The goal of risk management is to help protect your wealth from risks such as death, serious illness, income loss, property damage, and theft.

Prepare a property inventory, listing all assets and their value. This will help you determine how much insurance is needed and can help establish proof of loss in the event of a claim. Be aware of items that must be specially insured, such as jewelry, coin collections, antiques, works of art, etc. Also inventory your activities for possible sources of uninsured liability, which could include incidental business activities or rental property management.

It would be very expensive to insure every risk you are subject to, so you may decide to use other strategies for some risks. The primary ways to manage risk include:

  • Avoid the risk. There are some risks that insurance companies won’t insure or are very expensive to insure. Thus, your best strategy may be to simply avoid the risk. Some examples would be to avoid building a home near a flood plain, participating in dangerous sports, and smoking.
  • Reduce the risk. In many cases, you can reduce the possibility of loss through active steps on your part. For example, you can start exercising, install an alarm system, or wear seat belts.
  • Retain the risk. When the cost of insuring the risk exceeds the benefits you would receive, your best option may be to retain the risk. For example, you might not want to purchase extended warranty insurance on small appliances. The use of deductibles and coinsurance are also forms of retaining risk.
  • Transfer the risk. Typically, this is a policy used for major risks that can’t be eliminated through risk reduction or avoidance. You should consider insuring all potentially severe losses, such as death, disability, catastrophic health-care costs, major property loss, and personal liability suits.

When examining your risks, consider retaining those with small economic costs while transferring those with large economic costs. Your decision should be based on the amount of the possible loss, not your perception of how likely the loss is.

Once you decide how to deal with each risk, follow through and implement those techniques. Changes in your personal situation may make it necessary to change how you handle certain risks.

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