Personal Risk Management Overview

Personal Risk Management

• Risk is the possibility of harm, injury, loss, damage, or destruction. Risk impacts earnings (death/disability), personal liability (action/inaction), property (fire/theft), and investments.
• Two basic types of risk:
  • Speculative risk: Involves a chance of loss, gain, or no change.
  • Pure risk: Involves a chance of loss or no change; there is no chance of gain.
• Risk terminology:
  • Perils: The actual cause(s) of a loss.
  • Hazards: Acts or conditions that increase the likelihood of a peril or the severity of the loss.
• Three types of hazards:
  • Physical: Results from physical property (location, chemical composition).
  • Moral: Incentive to take additional risk, not fully bearing the consequences of one's actions. This can relate to insurance/finance/government policy.
  • Morale: Complacency and negligence from a perceived lack of risk; altered perception of risk when risk mitigation is in place (examples include automatic car door opener, house keys).
• Adverse Selection: Those at greater risk are more likely to purchase insurance to cover their risk.
• Nature of Contract: Valued/non-indemnity contracts determine payment amounts in advance, unaffected by the individual's actual loss. Indemnity contracts base payment amounts on the individual's actual loss.
• Insurable Interest: If loss or damage to an insured entity would result in actual financial loss. Financial interest, like ownership, and non-ownership cases matter. Relationships like dependency, emotional distress, and legal obligation factor into interest, affecting insurability. Insurable interest is necessary for property and liability insurance, as well as life insurance.
• Proximate Cause: The initial act that sets off a natural and continuous sequence of events resulting in injury or loss. Responsibility for the injury lies with the last negligent act.
• Co-insurance: A policy provision where both the insured and insurer share the loss, typically in a fixed proportion after a deductible is met.
• Co-ordination of Benefits (COB): A policy provision eliminating duplicate payments, providing coverage sequence (primary and secondary), when an individual is insured under multiple contracts.
• Structure of Insurance Policies:
  • Declarations: Who, what, when, and where of the particular policy.
  • Insuring Agreements: What the insurer agrees to do.
  • Exclusions: What the insurer will not do.
  • Conditions: Acts required for coverage from the policyholder.
  • Endorsements: Amendments to the original policy contract.
• Types of Pure Risk:
  • Personal Risks: Death/disability of individuals/family members, and unemployment.
  • Property Risks: Theft, damage, destruction of property, and direct/indirect effects.
  • Liability Risks: Damages through the legal system from carelessness/negligence, affecting personal injury, property damage, and punitive damages.
  • Failure of Others to Perform.
• Key Properties of Personal Risk:
  • Severity: Critical (serious financial consequences, bankruptcy), Material (serious financial consequences, reduction in SOL), and Minor (little financial consequences, minor effect on income/expenses).
  • Frequency: High, Medium, Low (likelihood of occurrence).
  • Risk Property Matrix: A depiction of severity and frequency's combined effect on risk assessment, to help assess risk and manage it appropriately.
• Risk Management Strategies:
  • Risk Control: Control Exposure to Risk, Control Severity of Loss, Avoidance, Reduction.
  • Risk Financing: Arrange for Funds to Cover Potential Loss, Transfer Financial Burden to Others, Sharing/Transferring, Retention, Safety Procedures, Pooling, Segregation, Diversification, Informal Deductibles, Waiting Periods, Co-Insurance, Exclusions
• Managing Personal Risk:
  • Steps (or phases) to manage personal risk: Define the Risk Management Objectives; Identify & Evaluate the Risks; Identify Appropriate Risk Management Strategies; Implementation; Review & Update
• Typical Objectives: Preserve household income during death/disability, Protect assets from theft/destruction, Personal liability from actions/inactions.
• Identify & Evaluate the Risks: Review financial statements (property at risk, income loss if death/disability). Review lifestyle/family situations (occupation, personal activities, legal liability, professional/volunteer activities, health conditions).
• Identify Appropriate Risk Management Strategies: Use Risk Matrix (severity/frequency).
• Implementation: Executing chosen risk management strategies
• Review & Update: Examining the effectiveness of the risk management process, and factors like job security, dependents, health, hobby/job changes, real assets value, cost of living, or beneficiary changes. Reviewing significant environmental changes.
• Risk Identification & Insurance Needs of Clients: (examples include Reed Chalmers, Schmendrick the Magician, Brian M., Salvatore Cuchimel, Eustace Wingtip)
• Essential questions about risk, and how to approach it.

Subheadings

• These subheadings are for better organization; the sections are related and not distinct topics.