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 encourage preventative care visits, often free of co-pays, where members can receive annual checkups and physical examinations. Insurers understand that spotting potential health issues early on and administering preventative care can help minimize medical costs in the long run.

#5 Loss Prevention and Reduction

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 insurer and individual. The contract states all the stipulations and conditions that must be met and maintained for the insurer to take on the financial responsibility of covering the risk.

#4 Transferring

<ul><li>Avoidance means not participating in activities that could harm you.</li><li>Retention acknowledges the inevitability of certain risks, and in terms of health care, it could mean picking a less expensive health insurance plan.</li><li>Sharing risk can be applied to how employer-based benefits are often more affordable than if an individual gets their own health insurance.</li><li>Transferring risk relates to healthcare in that the cost of the care is transferred to the insurer from the individual, beyond the cost of premiums and a deductible.</li></ul>

The Key Takeaways

Retention is the acknowledgement and <a href="https://www.investopedia.com/terms/a/accepting-risk.asp">acceptance of a risk as a given</a>. 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 a higher deductible rate. The initial risk is the cost of having to pay more out-of-pocket medical expenses if health issues arise. If the issue becomes more serious or life-threatening, then the health insurance benefits are available to cover most of the costs beyond the deductible.

#2 Retention

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 end by raising premiums for smokers versus nonsmokers. Under the <a href="https://www.investopedia.com/terms/a/affordable-care-act.asp">Affordable Health Care Act</a>, also known as Obamacare, health insurers are able to increase premiums based on age, geography, family size, and smoking status. The law allows for up to a 50% surcharge on premiums for smokers.

#1 Avoidance

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 participants sharing the risks, the costs of premiums should shrink proportionately. Individuals may find it in their best interest to participate in sharing the risk by choosing employer health care and life insurance plans when possible.

#3 Sharing

The basic methods for risk management can apply to all facets of an individual's life—especially health—and can pay off in the long run.