4 METHODS OF HANDLING RISKS

There is a need to devise ways of handling insurable risk given the negative effects it posed to individuals and businesses

As a result, we are going to be looking at methods of handling risk in this post.

Risk is exposure to unfavourable conditions. It can be defined as the possibility of occurrence of adverse deviation from the expected

Risk avoidance, risk retention, risk transfer, and risk reduction are the four methods of handling or managing risks.

1. Risk avoidance: This is a method of handling risk whereby an individual realizes the existence of a particular risk and decides not to participate if exposes to the particular risk.

It is a situation where an individual eliminates risk by staying out of any situation that poses the risk.

Risk avoidance means staying away from any form of risk exposure.

An example of risk avoidance is a car owner who avoids plying on a road that is considered insecure.

As another example, you can avoid stock market risk by not buying stocks at all.

Even though it isn't always possible, choosing to always travel by car can help you avoid the risk of being in an aeroplane accident.

2. Risk retention: This method of risk management involves a person realizing there is a risk, but instead of purchasing insurance coverage, the person decides to manage the risk internally.

In this type of risk management, when a person realizes there is a risk, he might choose to retain it by putting money aside to cover losses if the risk materializes.

In other words, rather than pay for insurance coverage, the individual exposed to the risk decides to pay out of his pocket when the loss occurs.

The advantages of risk retention are that an individual would be able to save money if the loss does not occur.

An example of risk retention is found among smokers. With every packet of cigarettes always having a warning of death or cancer, many smokers still go ahead to take it.

3. Risk transfer: This is a form of handling risk whereby the financial consequences of an event are shifted to a third party.

Risk transfer essentially means transferring the activities that create risks to another person or entity.

To be effective, risk transfer is usually documented in insurance contracts.

Insurance is a good example of risk transfer, where one party known as the insured transfer a particular risk to another party, on consideration of a sum of money known as a premium.

Another example of risk transfer is when an organization, knowing fully well that a particular production process is hazardous, decides to outsource it to another company.

4. Risk reduction: In this type of risk management, a person recognizes the presence of risk and takes steps to reduce its frequency and severity.

In other words, risk reduction means taking measures to minimize the occurrence of certain risks.

READ ALSO: EVERYTHING YOU NEED TO KNOW ABOUT LIFE INSURANCE

An excellent example of risk reduction is hiring a bodyguard, who is typically hired to at least defend their customers and reduce the possibility of attacks.

To reduce the severity of fire disasters, for instance, the majority of businesses have fire extinguishers.

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