TOPIC 1: Understanding Risk
TOPIC 2: Managing Risk
UNDERSTANDING RISK
RISK Types of Risk
is a state of Pure Risk
uncertainty Insurable Risk
where certain Personal Risk
situations may Property Risk
result in loss Liability Risk
or another Economic Risk
undesirable
outcome. Speculative Risk
TYPES OF RISK
Pure risk is a chance of loss with no chance for gain.
Pure risks are random, meaning they can happen to anyone.
Examples of pure risk include:
■ Accidents resulting in physical injury and damage to property
■ Illnesses that people get throughout life, as a part of aging
■ Acts of nature, resulting in damage to persons and property
TYPES OF RISK
Insurable risk is a pure risk that is faced by a large number of
people and for which the amount of the loss can be predicted.
There are three major insurable risks: personal, property, and liability.
Personal risk is the chance of loss involving your income and
standard of living. You can protect yourself and others who depend
on your income from personal risks by buying life, health, and
disability insurance.
TYPES OF RISK
Property risk is the chance of loss or harm to personal or real
property. To protect against such risks, you can buy property
insurance.
Liability risk is the chance of loss that may occur when your errors
or actions result in injuries to others or damages to their property.
Liability insurance will protect you if others sue you for injuring
them or damaging their property.
TYPES OF RISK
Economic risk may result in gain or loss because of changing
economic conditions.
Speculative risk may result in either gain or loss.
Speculative risks are not “accidental” or random and may result in
either gain or loss, you cannot protect yourself from losses in a
traditional manner.
Economic Risk
TOPIC 1: Understanding Risk
TOPIC 2: Managing Risk
MANAGING RISK
Risk Management
Process
Step 1: Identify Risks of Loss
Step 2: Assess Seriousness of Risk
RISK Step 3: Handle Risks
MANAGEMENT • Risk shifting
an organized strategy • Risk Avoidance
for controlling financial • Risk Reduction
loss from pure risks • Risk Assumption
RISK MANAGEMENT PROCESS
Step 1: Identify Risks of Loss
The first step in risk management is to identify potential risks.
Step 2: Assess Seriousness of Risks
Risk assessment is a systematic study of the risks that you face. It
involves understanding the types of risk you will face and their
potential consequences.
RISK MANAGEMENT PROCESS
Step 3: Handle Risks
There are four techniques you can consider to handle risk: shifting,
avoiding, reducing, or assuming risk.
Risk shifting also called risk transfer, passes risk to another party.
Risk avoidance lowers the chance for loss by not engaging in the
activity that could result in the loss.
RISK MANAGEMENT PROCESS
Risk reduction lowers the chance of loss by taking measures to
lessen the frequency or severity of losses that may occur.
Risk assumption is the process of accepting the consequences of
risk. To help cushion your financial burden, you could establish a
monetary fund to help cover the cost of a loss.
RISK MANAGEMENT PLAN
To avoid possible financial disaster, you should create a risk
management plan, which lists the risks you have identified, your
assessment of their financial impacts, and the techniques that you plan
to use to manage each risk.
Figure 21.5 outlines a risk management plan that a young
person might develop. A good risk management plan uses
various techniques to lower overall risk.
RISK MANAGEMENT PLAN
Insurance is an important part of any risk management plan. In
general, financial advisers say that a basic insurance plan should help reduce
risk and protect against the following:
■ Potential loss of income due to the premature death, illness, accident, or
unemployment of a wage earner.
■ Potential loss of income and extra expense resulting from the illness,
disability, or death of a spouse or other family member.
■ Potential loss of real or personal property due to fire, theft, or other
hazards.
■ Potential loss of income, savings, and property resulting from personal
liability (injuring a person or damaging the property of others).
TOPIC 1: Understanding Risk
TOPIC 2: Managing Risk
Reference: Managing Your Personal Finances, Joan Ryan 2015, Cengage Learning