Tuesday, July 16, 2013

Risk Mismanagement and Insurance Policy

You just open the various newspapers around the nation and have a look at the articles. The headlines generally look something 

like this - Fire Engulfs Building, Family Injured in Car Accident, Shop Assistant Held at knife point, Vandals damage shop

FRONT…..It is in our lifestyle, in our home and in our work.

In the Heinemann Australian Dictionary 4th Edition, risk is defined as the possibility of suffering harm, loss etc; and to take or run the risk of means there is a chance of exposing oneself to loss or to losing something.

Essentially risk can be one of four things. It can be:

1) Avoided – by not going out of your house, by getting deliveries to your front door, by choosing to do or not to do certain activities that may result in very limited social interaction.

2) Minimised - by installing smoke detectors in your office building, adding deadlocks and burglar alarms in your home, following and maintaining certain quality assurance procedures in your work environment, choosing certain lifestyle habits like not smoking and healthy eating.

3) Transferred – by identifying that you want another party to take on the risk of loss, as the value of the loss is not something that you are prepared to cover. In order for you not to assume that level of risk, you will normally pay for another party to take on the risk of loss (eg, insurance premium).

4) Retained – by deciding what you are prepared to lose or are willing to absorb in a loss situation. This can include increasing your excess on an insurance policy, not taking out a life or income protection insurance to cover death or loss of income, not having your home and contents insured, or not electing to include burglary insurance in a business policy.

Taking out an insurance policy means you are transferring risk. When you pay a premium you realise that the chance for loss and the cost of that loss means much more to you than the cost of the premium. By paying a premium you are asking to transfer that level of risk to a third party because you are not comfortable with what that loss could mean to you. In order to transfer the risk and to determine at what cost, an insurance company has certain rating factors that work out what premium you pay, and that will depend on the type of insurance you are looking to take.

Life insurance premiums will generally take into account factors like your occupation, age, lifestyle habits and sex. Business insurance premiums will generally be calculated on the type of business, the address, the construction of the building that you operate in and the type of cover selected. Car insurance premiums are generally based on the type of vehicle, driver history, driver date of birth and garaged location.  If you have ever wondered why an insurance company asks you what seems like a lot of questions, it's because the insurance company needs to assess the level of risk that you want to transfer, and for that level or risk.

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