Risk Management

Risk management is an approach to managing uncertainty through risk assessment, developing strategies to manage it. The strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk. Objective of risk management is to reduce different risks related to your life, business, finances, health, among other risks. Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories:

• Avoidance
• Reduction
• Retention
• Transfer

Includes not performing an activity that could carry risk. An example would be not buying a property or business in order to not take on the liability that comes with it. Another would be not investing in the stock market in order to not take the risk of loss if the financial markets were to fall. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Involves methods that reduce the severity of the loss or the likelihood of the loss from occurring. Examples include diversifying a portfolio through multiple asset classes and purchasing insurance on the portfolio. Insurance may include buying "call" or "put" options. In similar fashion, purchasing a fixed annuity to protect part of your portfolio. Involves accepting the loss when it occurs. This is also known as self insuring. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible. Means causing another party to accept the risk, typically by contract or by hedging. Insurance is one type of risk transfer that uses contracts. Fixed Annuity Contracts, Life Insurance Contracts, Long-term Care Contracts, Disability Contracts, and Health Insurance Contracts are examples of Risk Transfer. Further, you may partially transfer risk to an insurance company to accomplish partial Risk Transfer, also known as Risk Reduction.