Every day, as you set out to perform the tasks and activities you strive to accomplish, risk follows you. Risk is all around, surrounding your every decision and activity, giving rise to a vast possibility of outcomes. Risk is an inevitable part of life, one that you must manage to the best of your abilities to increase the likelihood of positive outcomes while diminishing negative ones. Risk can be defined as the uncertainty of a given outcome. We are not capable of knowing the future nor can we predict it with absolute certainty, there will always be the possibility of unknown or unexpected consequences arising, consequences that may result in positive or negative outcomes.
Positive outcomes are welcome, they may represent great achievements for you and are likely to arise when the chain of actions and events leading to the positive outcome proceeds prosperously to its end. However; risk and uncertainty lie at every stage. The chain of events that can lead to positive results can be derailed by many factors (some of which may be completely outside your control) and lead to disaster. There are tools that can be used to deal with risk, they fall in the categories of risk acceptance, reduction, avoidance or transfer which are described hereunder.
Risk Management Options
- Risk acceptance: faced with risk (and some knowledge of the possible outcomes) you may decide to move forward and perform the activity in question, thus accepting the risk of loss (negative outcome) in hopes of achieving a reward (positive outcome).
- Risk avoidance: you may decide to not perform the activity altogether thus completely avoiding all risk of loss that may arise but at the same time foregoing any possibility of reward.
- Risk reduction: having some knowledge of the risks inherent in the performance of a given activity you may find ways to reduce the likelihood of loss and increase the possibility of reward. This is achieved by implementing risk reduction factors to help lower the risk of adverse results.
- Risk transfer: you may transfer the risk of loss to another party while maintaining the possibility of achieving a reward.
Risk transfer lies at the core of the insurance industry. Insurance companies accept the risks faced by businesses and individuals in exchange for a fee known as the insurance premium. Insurance companies (known as insurers) accept risk on behalf of their clients (known as insureds) in the hope that the premium they receive in the aggregate will be enough to cover (or exceed) the amounts of loss the company becomes responsible to pay to or on behalf of its insureds. If the insurance premium received by the insurer exceeds the losses that must be paid to insureds (plus other expenses), then the insurance company will realize a profit (financial gain). If covered losses and expenses exceed the premium received, then the company will suffer a financial loss.
Insurance companies are specialized in the analysis of risk. An insurer’s willingness to insure an operation and the cost to do so reflect the perceived risk of negative outcome presented by the insured. There is a positive correlation between the perceived risk of loss and the amount of insurance premium an insurance company will charge to accept a risk. The higher the perceived risk of loss, the higher the amount of premium the company will charge. Conversely, the lower the perceived risk, the lower the premium.
Transferring risk by means of insurance is a great way to reduce uncertainty. An insured is exchanging the uncertainty of bearing a loss with an insurance company’s promise to pay for a covered loss and the certainty of a fixed premium amount payable during the duration of the insurance contract. If a covered loss arises and the terms of the insurance contract are met, the insurance company will indemnify (compensate) its insured for the loss, returning the insured to same condition enjoyed prior to suffering the loss.
Insurance is a complex system where many different types of risk are transferred and where trends periodically affect the attractiveness and the pricing of insuring different types of risks. We hope to become a resource for you to enhance your knowledge of risk and the insurance industry and we will cover many pertinent topics. Please continue to visit our blog to access new posts covering relevant insurance industry information and to gain more insight into the inner workings of the insurance industry.
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