Personal Risk Management

Introduction

Risk is the possibility of loss. Sometimes the loss is minor, while the other times it may cause major personal and financial hardship. In this article, we will discuss what are the 4 ways to manage personal risk?

Suppose, you are investing for your financial needs. Then, there are only three things that can keep you from achieving your financial goals : Inflation, Taxes and Risk.

  • It is easier to plan for inflation and to reduce taxes. For the detailed explanation of the same, Refer our articles on : taxyadnya.in
  • Risk is another matter, because it is so unpredictable. It can come in many forms, but the results are always the same: loss of money. The reasons for loss of money may be beyond your control.

How To Manage Personal Risk?

  • Before going into the actual risk management, we must how to identify what type of risk we are facing. After that only we can apply the corrective measures for avoiding or for minimizing such risk.
  • There are 4 broad classes of risks we may come across. They are Income Risk, Expense Risk, Asset/Investment Risk and the forth is Debit/Credit Risk. We are going to discuss these 4 types of risks in detail in our next article.
  • There is no way to eliminate all risk. But there are ways to avoid, minimize and to protect yourself and your family from risk.
  • When risk is low or the cost is not too high, it is easy to assume the risk. When it is too costly to assume the risk, you need other ways to manage it.
  • Insurance provides a convenient way to manage financial loss happened, due to catastrophic i.e. unfortunate risk.

Ways To Manage Personal Risk

Persoanl Risk Management
Persoanl Risk Management

You can manage risk in four ways, as detailed below. 4 Ways To Manage Personal Risk are as follows:

1.Assume Risk

  • As the name itself suggests, one must assume the risk associated with various aspects and objects of life. Which, if not taken care of may lead to financial losses.
  • Thus, in order to safeguard and avoid the financial losses, one should first list out the possible risks associated. And then he/she should work accordingly to curb the same.
  • For Example,having a life insurance cover or health insurance, would be a remedy for you, in case of any uncertain situation such as disability, death etc.
  • That means, if any of such unseen and unfortunate risk occurs, in such case you would be ready with the remedy taken at your end. So that, you don’t have to pay the full cost of such loss out of your own assets. Because it will affect adversely the achievement of your financial goals.

2.Avoid Risk

  • Avoiding the risk may not be easy, but this is one of the ways to reduce the risk management costs by doing so.
  • Risk avoidance can lower the financial cost of risk, which is why insurance premiums are lower for persons and businesses, that take measures to lower the risk.
  • For Example, the automobile insurance premiums are lower for drivers with good driving records (no accidents and no cited violations of driving laws) and that the non-smokers pay lower medical insurance and life insurance premiums than the smokers have to.

3.Share Risk

  • Sharing the risk divides the cost of risk among those who are the participants in the risk sharing.
  • For Example, in a household where there are two earners, the family income might be reduced in case if one earner losses the job or has lost some money, at least in such case all the money/ income is not lost. Meaning, at least to some extent the risk can be shared and adjusted with the earning member of the family.
  • Some insurance policies allows you to share the risks with the insurer i.e. the insurance company, in order to keep the premium low. If you can assume a certain amount of financial risk, then the insurance premium on the balance of the risk will be lower.
  • For example, some automobile policies have lower premiums if you are willing to take responsibility for the first Rs. 10,000 of liability, known as a deductible, in case of the risk occurrence. Another example is, where, the Medical Insurance Premiums can be lowered if you have higher co-payments or if you choose a Family Floater Plan.

4.Transfer risk

  • Finally, for those who cannot tolerate any financial risk, risk can be transferred to someone else, usually an insurance company, who assumes full responsibility for it. Of course, this method of risk management has the highest premium cost. An insurer i.e. the insurance company will pay the costs of loss to an insured, in consideration of a fees called premium, which is usually a very small fraction of the benefits to be paid. Insurance works because an insurer can determine the mathematical probability of a risk occurring and the financial risk at stake.
  • For Example, anyone who owns an automobile knows that he or she is required to have the automobile insurance in order to cover the risk of damage to someone else.
  • However, with many years of statistics on automobile damage costs, the insurers i.e. the insurance companies are able to determine the amount of premium necessary, to provide the benefits to insure the automobile owners.
  • Using the same principles, one can buy the insurance to minimize the financial loss due to accident, illness, disability and even death. The purpose of insurance is to provide the financial relief from catastrophic losses. Money from many people is pooled to pay for the losses, incurred by few.

Inference :

Given below is the inference and comparison based on the, impact of such method used to control the risk and cost involved in the same.

Cost vs Impact of the Methods to Control Risk
Cost vs Impact of the Methods to Control Risk
  • Therefore, you must analyze the risk first. And also the level it has low risk or high risk, and what impact will it have on you.
  • And then, you can analyze basis on which whether it should be transferred, shared, avoided or is required to be assumed.

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