How To Handling Risks?

Now that we know that risks are a part of our daily lives we must know how to handle them. Risk management will be discussed in detail under “Practice of General Insurance” and here we shall only make a passing reference to this important aspect.

Some of the methods used to handle risks are Risk Avoidance, Loss Prevention and Reduction, Risk Retention and Risk Transfer. For convenience sake these are briefly being dealt with separately but in practice two or more are used in combination.

1. Risk Avoidance

The simplest way to deal with risk is to avoid it together. If a factory is to be located on the banks of a river, which is prone to floods every year then it may be decided to shift the site to a safer location. Some people avoid the risk of death or injury in an aeroplane crash by traveling by surface transport only. Organisation like the Armed forces and even some corporate houses restrict the number of their officers traveling in a single aircraft or vehicle together to avoid the risk of all of them dieing in an accident. Though this is the simplest way it is not always practicable.

2. Loss Prevention and Reduction

Possible loss due to risks may be eliminated or minimized by Loss Prevention and Reduction measures. Some measures such as strict enforcement of “No Smoking” regulations may eliminate fire losses whereas measures such as installation of sprinkler systems and other appliances may reduce the extent of loss due to fire.

Good manufacturing units spend a lot on safety devices and measures and enforce strict rules of conduct within their premises to eliminate or reduce the occurrence of accidents thus minimise their losses & expense incurred on treatment and compensation to employees.

Segregation of hazardous processes from others in a manufacturing unit and isolation of hazardous goods such as petroleum products from non-hazardous goods in a storage facility are some examples of the method of loss Prevention and Reduction.

3. Risk Retention

It may be consciously decided to retain some risks. Small losses, which may occur frequently may be absorbed by the firm as normal operating expenses such as minor damage or loss of goods in transit.

A financially sound firm may create an Insurance fund to which regular payments are credited and from which losses are paid as and when they occur.

This method is used to take care of the domiciliary medical expenses of employees by some large companies having a big workforce.

Some individuals retain the risk of contracting cancer due to smoking not knowing that smoking causes cancer and other even though knowing of it rationalize and pretend that the risk does not exist by saying. “It won’t happen to me”.

4. Transfer of Risk

Risk transfer occurs when the activity that creates the risks is transferred to another. For example if a particular process of manufacture is hazardous the firm may decide to get it outsourced i.e. get the job done from a specialized subcontractor outside so that the associated risks are transferred.

Similarly when a person hires an equipment the owner may insert a condition in the contract that any damage to the equipment shall be the responsibility of the hirer. Lease and rental agreements are an example of this method of handling risk.

A rental agreement carries the clause that the equipment shall be returned to the owner in good condition, ordinary wear & tear accepted. Guarantees are also a form of risks transfer where the buyer transfers the risk of purchasing a defective new item back to the manufacture.

Most consumer goods coming in the market now are sold with the guarantee that in case of any manufacturing defect or non-performance the equipment will be replaced/ repaired by the manufacturer. Earlier it was not so and the buyer used to purchase the materials at his own risk and in case of defect had to bear the loss.

There are innumerable ways to transferring the risks and these are only a few illustrations but the most important method of Risk transfer is Insurance.

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