"Risk Management & Insurance Planning"

What area does Financial Planning cover?

The Foundation of Financial Planning
Risk Management is the cornerstone of any financial planning effort. It makes no difference how elaborate or effective the investment portfolio, the retirement plan, or the estate plan is. If you have not taken the necessary steps to eliminate risk, all remaining planning efforts could be pointless. Risk management through the wise use of insurance removes the concern for the unknown from a financial plan.

Risk Management and Risk Reduction
Some questions which you may ask when addressing risk.
 

•	Do I have sufficient health, disability, liability, homeowner and automobile insurance?
•	Do I have adequate life and personal accident insurance to protect my family and me?
•	Should I consider long-term care insurance?
•	What would happen if I became disabled and couldn’t work?
•	Should I buy term, whole-life, investment-linked or others?

How Do You Define Risk?
Risk is when there is an uncertainty about whether an event will or will not occur. Thus, risk management is the process of identifying exposures to risk, choosing the best method for handling each exposure and implementing it.

Risk Management Techniques
When it comes to risk management, there are 4 basic methods:

1. Risk Avoidance
To avoid engaging in an activity or owning property that might lead to an exposure of risk.
For example : Gambling is a Risk that could be avoided by not gambling.

2. Risk Retention
To recognize risk and accept it as part of its activities.
For example : We choose not to insure our household items against theft. We are in fact retaining the risk of lost through theft.

3. Risk Transfer
To transfer risk to another party.
For example : Purchasing a Life Policy to transfer the risk of losing our potential future income in case of Death or Disability to an insurance company

4. Risk Reduction
To take steps to reduce the uncertainty of loss.
For example : Installing burglar alarm to reduce chances of break in and consequent losses.

So, whether we are aware of it or not, we are actually addressing our risks through one or all of the above techniques. However, some method/s of managing risks is/are more appropriate than others.

As much as we would like to transfer all our risks, certain conditions need to be considered. One of which is insurable interest. Insurance generally works on 2 principles, namely the concept of insurable risk and the concept of insurable interest.

The Concept of Insurable Risk
Insurable risk would refer to the risks for which an insurance policy can be purchased. For all types of insurance other than life insurance, insurable risks must be financial in nature, measurable and predictable. An insurable risk in general is a loss that is not intentionally caused by the insured.

The Concept of Insurable Interest
Insurable interest means one must stand to suffer a measurable loss (in currency) if the insured-against event occurs. With property insurance, an insurable interest must exist at the time of the loss. As for life insurance, the insurable interest must exist at the time the policy was issued.

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