The Risk Management Quadrant

Each moment we live, we face risk. Risk here means possibility of harm to you. This harm can be personal involving you or your family. It can be financial involving expenditure of money. In many cases, it can be both, such as  an accident. We therefore have to manage this risk in our lives. To understand this risk, you need to understand the risk management quadrant. Then you can apply this to any aspect of your life.

The Risk Management Quadrant

Risk management quadrant

Risk avoidance: You can manage risk by avoiding it. If you do not drive a car, then you do not need car insurance. So when you considering something risky, not necessarily driving a car, you can consciously think about the risk of the event and whether you want to avoid the event itself.

Risk reduction: You can manage risk by doing things that will cut the risk. This is very important because this is within our control. Driving carefully, being healthy, not engaging in risky occupations, etc are good examples of how we can reduce risk.

Risk assumption: You can manage risk by accepting the risk personally and financially. If you have a lot of money, you may decide you do not need any life insurance. Even if you die, your family will be comfortable because you have enough money. You may not take health insurance because you feel you have saved enough money for it and that will take care of any health problems in your family. You decide you do not need mobile handphone insurance because you think you can easily replace it and it is not that expensive.

Risk transfer: This is insurance. You pay a certain amount of money to a company for a particular event. If that event happens, the company will pay you a certain amount of money. This is useful where you cannot avoid or cut the risk and you are not willing to assume the risk yourself; like your house falling to ground. But in insurance, the person who sells you the insurance usually makes a profit and there is always almost a conflict of interest. You have to aware of it and make decisions accordingly.

If you can look at risk in this way, you will make wiser decisions about the management of risk in your life.

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