Risk is a fact of life. We might not like it, but it’s not going away. There are two types of risk:
Pure Risk: We can only lose if an event occurs; for example, the risk of a flood doing damage to your house in any given year. Either the house is damaged by flood, or it is not. This type of risk is generally insurable.
Speculative Risk: We can lose, gain, or stay the same. Gambling is an example of speculative risk. You can win money, lose money, or come out even. This type of risk is NOT traditionally insurable (although there are sometimes ways to hedge these risks, like diversifying your investment portfolio).
Wealth creation and risk planning go hand in hand. Risks can never be totally eliminated from any aspect of life. The next best thing to do is to minimise risks. The primary goal of personal Risk Management is to protect one’s goals, dreams, treasure and personal well-being from those "what ifs" that might become "what now"?
The Risk Management process involves three steps:
- The cause and nature of the risk should be identified. For example: Premature Death, which leaves the family to cope with lack of income to pay debts and living expenses.
- A determination should be made of how much risk a person should be willing to retain. In the case of a homeowner’s policy, how much of a deductible should be assumed? Or, if you live in the mountains, should events such as earthquake or flood be covered, since they are unlikely to occur?
- Determine how to handle risk NOT retained. A crucial Risk Management factor is to balance the expenditure of insurance premium dollars against the risks that present the highest negative impact to the individual’s personal financial plan. We could insure ourselves from almost any risk but go broke paying the premiums.
We at The Financial Mall helps you in Risk Management & Planning by the following ways:
Risk avoidance: Decide on what risk can be totally avoided and what cannot be. Avoid those high-risk activities in your life that, should they happen, would be catastrophic to your personal financial plan. Examples of these activities would be speeding, dangerous sports, smoking, etc.
Risk retention: Accept risks which can’t be shared or transferred and create a budget for it. Differentiate and separate acceptable and unacceptable risks to plan accordingly. In this case the risk must not impose a substantial financial or non-financial threat to you. For example, "I do not insure my life because I have no debts or obligations," or "I forego accidental insurance or disability insurance because I believe I have enough in financial assets and cash flow to pay out-of-pocket for this type of medical care.
Risk Reduction: There are two sub strategies to this method: Loss Prevention and Control, for example: use of fire and burglar alarms, air bags, and smoking and weight control programs. Risk reduction can also involve minimizing risk by using an insurance company that uses the law of large numbers to maintain their solvency.
Generally, investments with high risks have better returns but how much risk is acceptable? It also involves reducing the severity of loss from occurring and building strategies around it.
Risk sharing: In this strategy one assumes a limited degree of manageable risk and transfers the balance of the risk to one or more organizations. For example, I choose a high deductible health plan that would require me to pay the first 5,000 rupees of any major health bills, but would then pick up 100% of the cost after that. This risk sharing agreement allows me to cut my insurance premiums. I can cover the 5,000 rupees in risk and hope that over the long run my reduction in premiums justifies the risk of having to pay 5,000 out-of-pocket.
Risk transfer: Unacceptable risks are transferred generally by means of insurance. We can transfer risk completely to a third party in consideration of a premium. Life, disability, and liability risks are often dealt with in this way.
At The Financial Mall, we emphasize on Financial Risk management. Financial risk planning places a heavy emphasis on protecting the financial assets and resources of an individual or an organization.
So, what are the risks that we run? To name a few - the risk on our lives (i.e. the worries of replacement of the incomes that we contribute to the running of the household), the risks of medical contingencies (since they have the capability of throwing plans of a financial nature off guard) and risks on assets (since the replacement of those has tremendous financial implications at times). If we were to consider a situation where any of our goals in life were to be disturbed by acts beyond our control, we would realize the relevance of insurance in our lives.
So, as a matter of practice, always consider the risks that surround us, and then insure yourself against those risks. There is no risk not worth insuring yourself against, and insurance should first and foremost be looked as a measure to guard against the risks - the risks of your dreams going awry due to events beyond your control. At The Financial Mall, the Endeavour is to always design a risk management plan which is structured and systematic and the aim is to be both transparent and inclusive at all times.