What is risk management?
Like the words imply, it is about understanding what risks you face and taking steps to deal with the risk before something happens. Generally speaking, risk management ranges from you basically rolling the dice, to letting others share the risk with you for a fee.
Avoiding anything, including your mother-in-law, is generally not an efficient means of managing risk. Renting a property instead of purchasing it in order to avoid financial repercussions if the premises are damaged seems like great risk avoidance. In reality however, depending on the landlord/tenant agreement you will probably have to pay for any damages caused to the property, so avoidance is generally not an effective method of risk management as all risks cannot be avoided, some are just out of your control.
Some large companies and governments will self-insure. That means if things go wrong they have to come up with all the money to fix it. For families and business owners however this is the most expensive way you can buy. How many times have we seen news coverage where people have lost everything and they say they are not insured? They are left on the street starting over. The costs to rebuild an entire house or commercial building, or defend a lawsuit would be financially crippling. If insurance is “expensive” then no insurance or “self-insurance” is the most expensive of all.
You can attempt to control some risk by the use of devices such as burglar alarms and fires sprinklers or simply locking your doors and windows and turning off appliances when you aren’t home. This can prevent many losses, or reduce their severity but doesn’t protect you from everything. Having an alarm or locking your doors doesn’t protect you from hail damage, lightning strikes, windstorms, water damage and earthquakes. Also, equipment can malfunction, people can forget to set them and some don’t work if the power goes out. So they are good to have, but alone won’t cover all potential risks.
Insurance effectively shifts the risk of loss from you to the insurance company in exchange for an annual premium. You will have to pay a relatively small deductible when you make a claim. Here is an example. A hailstorm ruins the roof of your home. The cost to replace it is $12,000. If you have an insurance policy, you may pay a small deductible, but the insurance company pays the rest. This method of risk management is usually the most effective means of managing financial risk for most families, businesses and organizations. After all, the entire goal with insurance is to “spread the losses of the few, among the shared cost of many.”
Risk Common Sense
This is not an actual risk management technique, but I put it in here anyways. It goes without saying, use common sense to reduce or eliminate as many risks as you can, and insure against those you can’t at a realistic value.
Ensure your deductibles are within reach, and work with your broker to ensure that your limits of coverage are adequate and sufficient. You don’t want under or over insure. Also, make sure you are aware of exclusions and possible gaps in coverage, where you carry all of the risk. If you have a hunch you have a possible gap in coverage, get in touch with your broker right now. You don’t want to have a catastrophe and find out that you are not covered.
*This column is intended for entertainment/informative purposes only and is not intended to act as a substitute for seeking the advice of a licensed Insurance Broker or other qualified professional. Coverage is subject to the policy terms, conditions and exclusions – please refer to policy documents– specific circumstances may alter the availability of coverage.
Read more Kris' Insurance Corner articles
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- Flood insurance: you're not covered! Apr 4
- Environmental Impairment Liability Feb 27
- High value homeowners' insurance Jan 26
- Holiday safety reminders Dec 19
- Business & commercial insurance tips Dec 2
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