First, I'm going to, again, provide some categories for the different tools just
like we categorized our risk in the first section of the lecture.
And first, I want to talk a little bit about risk avoidance and risk reduction.
Now specifically here, we're talking about strategies or actions that an individual
may take on that are going to directly change either the likelihood of a risk
occurring or if that risk does occur it's going to impact the severity of that risk.
Okay, so again, these are behaviors or
actions that you can take on as an individual that could be part of
your risk management plan that are going to directly impact the risk itself.
All right, so some very common examples that we might think of here diversifying
your investment portfolio.
We touched down this a little bit in the long-term
investment section of the course.
But here we might be combining multiple assets to reduce the likelihood of a loss
or the size of a loss if it occurs
with the investments that we've selected to include in our portfolio.
Some other more personal examples might be from a driving perspective,
we can think about using our seat belt.
That maybe will reduce the likelihood that you're in an accident.
But it most likely is going to reduce the severity of any injuries that you
might face.
If you do get into a car accident, we can think about changing our
driving behavior or maybe slowing down a little bit.
Driving at or below the speed limit to reduce the likelihood of a car accident.
Or we can think about our behaviors like just simply not texting
while we're driving, that's also going to reduce the likelihood of an accident and
helped to avoid or reduced some of the risks that we face.
Finally, I've also listed up here from a health perspective,
we might think longer term about implementing regular exercise routines or
a balanced diet into our everyday life.
And long term, that should reduce the likelihood and
the severity of some of the health related risks that we face as individuals.
Right now I'm going to talk a little about a different kind of topic,
specifically risk sharing or risk transfer.
So here we're talking about the use of tools or
the use of strategies that don't necessarily change the risk itself.
But it's going to help to change the outcomes if that risk does occur or
some sort of loss occurs because of a risk.
Okay, so here we're not talking about changing our behavior and
having an impact on the risk itself.
We are talking about using resources to change the outcomes if those risks occur.
So again, some examples here,
that we might be able to relate to ourselves as individuals.
From a business perspective, if we were worried about losing the money that we've
invested in a business, we might think about taking on additional business
partners to spread that risk or share that risk across multiple individuals or
taking on additional investors.
Or just from a financing perspective,
we might think of using a combination of debt and equity financing just so
the business isn't financed completely by our own financial resources.
We're also using a lending institution
that's going to share in some of that business risk.
Again, on a more personal level, and
something we're going to get into in more detail as we continue to move on.
Another way to share or
transfer risks to other parties is through the use of insurance contracts.
And we're going to see a number of examples here of very common insurance
contracts that are used to transfer burst business or personal risks or
losses from the individual to
the insurance company that's going to take those on as part of the insurance policy.
All right, and then finally I want to talk a little bit about and
differentiate between what people often call self insurance versus an explicit or
formal insurance contract.
So first of all self-insurance against something that we've covered in
other areas in the class.
Self insurance refers to designating savings to be used if a risk
occurs in that cause sort of a loss.
So again example that we've talk about before,
establishing an emergency savings fund.
So we have some money valuable to cover things if they come out.
Things that are good for emergency savings, maybe some unexpected
damages to our car or repairs that we need to our car over time.
We don't necessarily know when they're going to occur, or
even if they definitely will occur but they're pretty common and
things that we can plan for by setting aside some savings in an emergency fund.
Now in contrast, formal insurance policies
refer to things where an actual insurer, another party is involved and
they agree to bear the cost if something occurs that causes a financial loss.
And the individual or the insured for
that service pays that insurer a premium, all right?
And again, we're going to talk about some specific examples of
formal insurance contracts.
That's a very common types that a lot of us are familiar with all ready
are auto insurance, health insurance and life insurance.