Risk Management & Insurance Planning
Risk
Risk is when there's an uncertainty about whether an event will or will not occur. Thus, risk management is the process of identifying exposures to risk, choosing the best method for handling each exposure and implementing it.
Insurance refers to a contract that reduces risk of loss and requires one party to pay a specified sum to another if a previously identified event occurs. Thus, insurance planning is the process of handling and safeguarding against future risk of loss and ensuring sufficient compensation is provided.
Risk Management Techniques
When it comes to risk management, there are 4 basic methods :
- Risk Avoidance
To avoid engaging in an activity or owning property that might lead to an exposure of risk.
- Risk Assumption
To recognize risk and accept it as part of its activities.
- Risk Transfer
To transfer risk to another party.
- Risk Reduction
To take steps to reduce the uncertainty of loss.
Insurance generally works on 2 principles, namely the concept of insurable risk and the concept of insurable interest.
The Concept of Insurable Risk
Insurable risk would refer to the risks for which an insurance policy can be purchased. For all types of insurance other than life insurance, insurable risks must be financial, measurable and predictable. An insurable risk in general is a loss that is not intentionally caused by the insured.
The Concept of Insurable Interest
Insurable interest means one must stand to suffer a measurable loss (in currency) if the insured-against event occurs. With property insurance, an insurable interest must exist at the time of the loss. As for life insurance, the insurable interest must exist at the time the policy was issued.
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