4. Protect Against Financial Loss
b. Examples of various ways to manage financial risks
Risk is uncertainty about whether a financial loss will occur and, if it does occur, and how much it will cost. There are four ways to manage financial risks: avoid them, reduce them, accept them, or transfer them to someone else.
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Hopefully, you recognized that buying insurance is a means of “risk reduction” and “risk transfer.” You are transferring the cost of a loss to others, but you still maintain some responsibility but your risk is reduced.
If you stop skydiving, you are avoiding risk by eliminating the possibility of being hurt by skydiving.
When you plan to cover costs for a car that wouldn’t bring much from the insurance company even if it were wrecked, you are insuring yourself and accepting the risk. Note that we didn’t even suggest the possibility of dropping your auto liability insurance
. That action would be illegal (not to mention foolish).
Installing smoke detectors is a way to reduce risk. Such warning devices should help you save your family and help the firefighters save the house.