Insurance is Only One of Four Methods to Manage Risk

Building blocks of managing riskBuying insurance only covers a portion of the risk management puzzle.  There are actually four methods in which to manage risk.

The four methods to manage risk are avoidance, reduction, transfer and retention.

Avoidance is the removal of the potential exposure or Hazard. An example is homeowner liability claims from dog bites. If you don’t want to be sued from your dog biting someone, then manage the dog to avoid the risk.

Reduction is the process to reduce the likelihood of a claim. A homeowner can install a fire sprinkler system, smoke detection system and fire extinguisher in their home to reduce the probability of a fire loss or reduce the overall claim.

To transfer the potential financial loss uses Insurance. You should only transfer those exposures you could not afford to a loss such a disability, death, a home or auto liability claims.

Retention is retaining the exposure yourself. Ninety percent of American does not have disability insurance. So they are “self insuring” or retaining the financial loss should they become disabled.
Now, insurance must meet several criteria.  They are:

– The law of large numbers must apply,
– The risk must be measurable in terms of financial loss,
– The loss must create a financial hardship,
– And the loss must not be catastrophic.

Insurance companies use statistical analysis and mathematical modeling to measure the probability of you having a loss. The factors used are changing quickly with technology. Smart chips and GPS tracking are two examples of technology based probability measuring.

Floods, earthquake, nuclear exposure, acts of war are catastrophic. These exposures are excluded from most insurance policies. The potential exposures would exceed the company financial capacity to pay losses.

To properly manage your risk, I would advising using a little of each of these four methods.  For more information contact us at Paula Smith Insurance by completing the contact form to the right or call us at (281) 488-8880.  Let us help you protect your assets by helping you manage your risk.



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