Everyone is managing risk daily. Some risk management is natural to you while some risks require deliberate efforts.
There are some risks which are manageable and some are non-manageable. Even some risks are not known which means unforeseeable.
You do not walk on the railway tracks but you can walk on the railway bridge and the bride can collapse.
Not walking on the railway tracks is the risk you are avoiding. The collapse of the bridge can make you injured or you also can die. The financial impact of these risks can be reduced by health insurance and life insurance policies.
The framework of risk management requires you to classify your financial risk in 4 categories. Avoid, Reduce, Transfer and Accept known as ARTAI framework.
These are risks which you can avoid by your proactive action or non-action.
Swimming in the river entails drowning risk, eating junk food entails obesity and heart risk, driving two wheeler vehicles could be risky, indulging in the wrongdoings could land you in jail.
All these risks are avoidable by not taking the risks. These risks are simply avoidable. These are risks which become risk by our actions and not by any external actions.
Some of the risks are foreseeable and hence can be avoided. You will not be able to earn after retirement and you will need money to survive. You avoid the risk by saving and creating your retirement corpus.
Some risks are risks you can reduce the chances of occurrence. You can reduce the financial impact of such risks.
Here come the Life Insurance policies to your rescue. The risk of death cannot be prevented but its impact can certainly be reduced by having adequate life insurance policies.
You can transfer the risk impact to someone else. This is where non-insurance policies come into the picture.
You can transfer the risk of theft, natural calamities, travel baggage risk, to insurance companies.
When the casualty of an event is anything other than your life, the financial risk can be transferred.
When the possible casualty is life, the risk per se may not be transferred but its financial impact can be transferred.
Some risks are unavoidable. Accept the risk. The acceptance helps you mentally prepare to encounter the risk.
You can be sacked from the job anytime. Your or the family members become sick and expenses for the treatment is beyond your medical insurance policy.
You know the potential risk but you cannot plan or manage the risk. The only thing you can do is to remain prepared to deal with it.
Everything in life is a risk. You have to assess the impact of the risk. Decide what can do done about it i.e. avoid, reduce, transfer or accept.
For the rest of the risks, you can do nothing but ignore it altogether. You cannot live your life worrying about the risk all the time.
Once you have assessed the risks and classify as per the ARTAI framework, then you have to live without the fear of risks.
One important point you need to consider while assessing these risks is to involve others in your discussion. Experience of others can help you to evaluate the different aspect of risks. It also throws up more options to deal with it.
Next time you come across any risk, classify as per the ARTAI model and take appropriate action. If you can’t classify a risk, just ignore.
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