Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. As people begin to age, they usually encounter more health risks. Managing pure risk entails the process of identifying, evaluating, and subjugating these risks—a defensive strategy to prepare for the unexpected. The basic methods for risk management —avoidance, retention, sharing, transferring, and loss prevention and reduction—can apply to all facets of an individual's life and can pay off in the long run.
Here's a look at these five methods and how they can apply to the management of health risks. 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. According to the American Lung Association, smoking is the leading cause of preventable death in the U. Centers for Disease Control and Prevention notes that smoking is the No. Life insurance companies mitigate this risk on their end by raising premiums for smokers versus nonsmokers. Under the Affordable Health Care Act , also known as Obamacare, health insurers are able to increase premiums based on age, geography, family size, and smoking status.
Risk management strategies used in the financial world can also be applied to managing one's own health. Retention is the acknowledgment 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 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. If the individual has no serious health issues warranting any additional medical expenses for the year, then they avoid the out-of-pocket payments, mitigating the larger risk altogether.
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.
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. By accepting the terms and conditions and paying the premiums, an individual has managed to transfer most, if not all, the risk to the insurer.
However, there is always greater risk to speeding, since it always takes longer to stop or change direction, and, in a collision, higher speeds will always result in more damage and a higher risk of serious injury or death, because higher speeds have greater kinetic energy that will be transferred in a collision as damage or injury.
Since no driver can possibly foresee every possible event, there will be events that will happen that will be much easier to handle at slower speeds than at higher speeds. For instance, if someone fails to stop at an intersection just as you are driving through, then, at slower speeds, there is obviously a greater chance of avoiding a collision, or, if there is a collision, there will be less damage or injury than would result from a higher speed collision.
Hence, speeding is a form of passive risk retention. Risk can also be managed by noninsurance transfers of risk. The 3 major forms of noninsurance risk transfer is by contract, hedging, and, for business risks, by incorporating.
A common way to transfer risk by contract is by purchasing the warranty extension that many retailers sell for the items that they sell. The warranty itself transfers the risk of manufacturing defects from the buyer to the manufacturer. Transfers of risk through contract is often accomplished or prevented by a hold-harmless clause , which may limit liability for the party to which the clause applies.
Hedging is a method of reducing portfolio risk or some business risks involving future transactions. Thus, the possible decline of a stock price can be hedged by buying a put for the stock. A business can hedge a foreign exchange transaction by purchasing a forward contract that guarantees the exchange rate for a future date.
Investors can reduce their liability risk in a business by forming a corporation , an S corporation , or a limited liability company. This prevents the extension of the company's liabilities to its investors. Insurance is another major method that most people, businesses, and other organizations can use to transfer pure risks , by paying a premium to an insurance company in exchange for a payment of a possible large loss. By using the law of large numbers , an insurance company can estimate fairly reliably the amount of loss for a given number of customers within a specific time.
An insurance company can pay for losses because it pools and invests the premiums of many subscribers to pay the few who will have significant losses. Not every pure risk is insurable by private insurance companies. Events which are unpredictable and that could cause extensive damage, such as earthquakes, are not insured by private insurers, although reinsurers may cover these types of risks by relying on statistical models to estimate the probabilities of disaster.
Speculative risks — risks taken in the hope of making a profit — are also not insurable , since these risks are taken voluntarily, and, hence, are not pure risks. Risk is often defined as the probability of loss, but the real probability of an event usually cannot be known, so the probability is assessed subjectively, where the risk taker must assess the probability of certain risks based on the information pertaining to that risk. Thus, the best strategy for avoiding or reducing risk is gathering more information, which can be used to avoid more risk, to prevent unintentional risk retention, and to learn better ways of managing risk.
Usually, retained risks occur with greater frequency, but have a lower severity. An insurance deductible is a common example of risk retention to save money since a deductible is a limited risk that can save money on insurance premiums for larger risks.
Businesses actively retain many risks — what is commonly called self-insurance — because of the cost or unavailability of commercial insurance. Loss prevention requires identifying the factors that increase the likelihood of a loss, then either eliminating the factors or minimizing their effect.
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