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INVESTOPEDIA

5 Basic Methods for Risk Management

5 Basic Methods for Risk Management

investopedia.com

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The Key Takeaways

  • Avoidance means not participating in activities that could harm you.
  • Retention acknowledges the inevitability of certain risks, and in terms of health care, it could mean picking a less expensive health insurance plan.
  • Sharing risk can be applied to how employer-based benefit...

#1 Avoidance

Avoidance is a method for mitigating risk by not participating in activities that may incur injury, sickness, or death. Smoking cigarettes is an example of one such activity because avoiding it may lessen both health and financial risks.

Life insurance companies mitigate this risk on their ...

#2 Retention

Retention is the acknowledgement and acceptance of a risk as a given. Usually, this accepted risk is a cost to help offset larger risks down the road, such as opting to select a lower premium health insurance plan that carries ...

#3 Sharing

Sharing risk is often implemented through employer-based benefits that allow the company to pay a portion of insurance premiums with the employee. In essence, this shares the risk with the company and all employees participating in the insurance benefits. The understanding is that with more parti...

#4 Transferring

The use of health insurance is an example of transferring risk because the financial risks associated with health care are transferred from the individual to the insurer. Insurance companies assume the financial risk in exchange for a fee known as a premium and a documented contract between the i...

#5 Loss Prevention and Reduction

This method of risk management attempts to minimize the loss, rather than completely eliminate it. While accepting the risk, it stays focused on keeping the loss contained and preventing it from spreading. An example of this in health insurance is preventative care.

Health insurers encourag...

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