Risk involves the possibility of a financial loss. A financial loss can occur from a reduction in the value of an asset an individual possesses, or a reduction in the value of something an individual expects to receive in the future. Therefore, risk is either pure or speculative. Pure risk involves the possibility of financial loss or no loss. Speculative risk involves the possibility of financial loss or gain. Risk and uncertainty are not the same. Furthermore, risk is not the probability of loss. Pure risks include personal, property, and liability. Personal risks involve the possibility of loss of income earning ability because of premature death, disability, unemployment, or retirement. Property risks involve the possibility of direct and indirect losses associated with replacing or repairing property. Liability risks involve the possibility of loss from damaging or destroying the property of others or causing physical or personal injuries to others.
Techniques for individuals to manage pure risks include control and financing. Control reduces the probability that events resulting in financial loss could occur and minimizes the magnitude of losses that do occur. However, some losses occur regardless of any control activities. Therefore, financing is how to fund the losses. Both control and financing include several strategies for managing pure risks. Control strategies include avoidance, prevention, and reduction. Financing strategies include retention and transfer.
Individuals seek to eliminate activities or conditions that give rise to a particular risk so the possibility of a loss becomes nonexistent.
Individuals seek to reduce the frequency of loss associated with inescapable risks by preventing the occurrence of loss.
Individuals seek to reduce the severity of losses that occur.
Individuals seek to retain risk, either consciously or unconsciously, by financing the losses.
Individuals seek to transfer risk to another party for a price.
QUESTION: How do you manage risk?
Chris Bryant is an American financial advisor.