Unit 2: Risk Management Process

Unit 2: Risk Management Process

1. Step 1: Setting Risk Management Objectives

   • Involves reducing fear of the unknown and increasing an individuals confidence in the future.  Ex: Ensure that the family unit has sufficient financial resources should either spouse become disabled. 

2. Step 2: Identifying and Evaluating Risks

   • 3 Types of Consequences
     • The evaluation of risk should include an examination of the individual's financial, family and lifestyle circumstances. 
     • Dire
       • Those that could result in significant financial losses generally leading to bankruptcy or the disposition of most assets.
     • Substantial
       • Those where the individual or family unit would face serious financial difficulties that lead to a reduced standard of living.
     • Minor
       • Those where the potential financial loss is very low. 
   • Types of Risks
     • Speculative Risk
       • A risk where there is a potential for a loss or gain.
     • Pure Risk
       • Uncertain whether or not a loss will occur, but there is no chance of a gain. 
       • Liability Risk
       • Personal Risk
       • Property Risk
     • Static Risk
       • Risk where the magnitude is predictable, quantifiable and measurable. - The potential for such losses can often be protected by insurance.
     • Dynamic Risk
       • The broad risk associated with changes in the economy that affect society as a whole.
     • Fundamental Risk
       • Broad risk affecting large groups of the population & is a result of economic, political or natural causes. Ex: Flood or earthquake.
     • Particular Risk
       • Single, isolated events that give rise to losses at an individual level. Ex: Theft from an individuals home.
   • Hazards Vs. Perils
     • Peril: A cause of a possible loss.   -Ex. Fire, flood or boating accident. Hazard: A specific situation that increases the possibility of a loss from a specific peril.    - Physical Hazard    - Moral Hazard

3. Step 3: Selecting Strategies

   • Risk Control Strategies
     • Intended to reduce the probability of a risk occurring and/or the severity of the consequences that could result from a potential risk.
     • Risk Avoidance
       • An individual avoids a potential risk. - Focus is on eliminating risk
     • Risk Reduction
       • Involves activities that reduce the probability of a risk occurring. Focus is on lowering the potential risk. - Good for when a person is unable or unwilling to eliminate a risk.
       • Segregation
         • By separating important people/things, you are able to reduce the risk of losing all of them.
   • Risk Financing Strategies
     • Risk Transfer/Sharing
       • A tool where an individual either transfers or shares the cost of a risk occurrence with another party. - Often for substantial or dire consequences  - Insurance is an example because if a specific event occurs, you are able to share the cost with the carrier.
       • Deductible/Co insurance
         • An individual and the insurance carrier share the cost associated with the occurrence of a specified risk.
     • Risk Retention

4. Step 4: Implementation

5. Step 5: Monitoring

   • An individuals circumstances are constantly changing along with the products and info available in the marketplace. Plans must be reviewed and updated regularly.