Ways of Handling Risk

Ways of handling objective Risk and how these are relevant to Insurance.

Risk is the possibility in variability in outcomes around some expected value. It can also be defined as the expected losses. Objective Risk is risk that can be quantified numerically.

There are various ways of handling Objective Risk and the ideal use of these strategies may not be possible. Some of them may involve trade-offs that are not acceptable to the organization or person making the risk management decisions.

Risk avoidance

This includes not performing an activity that could carry risk. Exposure to losses can completely be eliminated by reducing the level of activity to zero. An example would be not buying a business in order to not take on the legal liability that comes with it. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.

Loss control

Loss control works by either loss prevention, which involves reducing the probability of risk, or loss reduction, which minimizes the loss.

Losses can be prevented by identifying the factors that increase the likelihood of a loss, then either eliminating the factor or minimizing its effect. For instance, speed and driving drunk greatly increase auto accidents. Not driving after drinking alcohol is a method of loss prevention that reduces the probability of an accident. Driving slower is an example of both loss prevention and loss reduction, since it both reduces the probability of an accident and, if an accident does occur, it reduces the magnitude of the losses, since slower speeds yield less damage.

Most businesses actively control losses because it is a cost-effective way to prevent losses from accidents and damage to property, and generally becomes more effective the longer the business has been operating.

Risk reduction

Exposure to...