Page 34 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 2: Risk and Insurance

Advantageous things will be or are more likely to be achieved. Notes
An important part of determining the right level of insurance that you should have is
understanding risk. Risk, in terms of insurance, is uncertainty concerning the occurrence of a
loss.
There is risk in all areas of your life: there are risks involved in your lifestyle, your career, your
environment, and so on. You can manage risk in four ways: you can avoid risk, reduce risk,
assume risk, or transfer risk as shown in the figure below:

Figure 2.3: Risk Management Strategies

Transference (or Sharing) Avoidance

Risk Management Strategies

Acceptance Reduction

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1. Avoid risk: You can avoid some risks, such as risks to your health, by taking care of
yourself, eating well, and exercising. You can avoid some financial risks by avoiding
high-risk occupations and diversifying your investments.
2. Reduce risk: You can reduce some risks by adding fire extinguishers and burglar alarms to
your home, adding airbags to your car, or getting regular medical check-ups. By taking
these precautions, you can reduce the potential damage of some risks.
3. Assume risk: You can assume some types of risk through self-insurance.

Example: A used to own a 1973 Ford Pinto. Instead of carrying full-coverage insurance,
which would have allowed him to get the car fixed if it were in an accident, he carried only
liability insurance. If he had been in an accident, he would have had to pay to have the car fixed
himself.

If the costs are not too high, you can assume some risks by assuming the potential for
additional costs.
4. Transfer risk: You can transfer risk to others by purchasing insurance. You pay premiums
to transfer the risk to an insurance company. Buying insurance is the process of transferring
financial responsibility for a specific risk—death, disability, liability, and so on from
yourself to an insurance company.
Once you understand how to manage risk, you can determine which risks you can avoid, reduce,
or assume, and which risks you should transfer to an insurance company or other entity.

Self Assessment

Fill in the blanks:
15. Risk Management evaluates which risks identified in the risk ……………………………
process require management.

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