Risk management is a process to identify and understand potential risks which could impede our clients’ ability to reach their goals and objectives. A risk management plan includes strategies and techniques for recognizing and confronting these threats. Good risk management does not have to be expensive or time consuming; it may be as simple as answering these three questions:
- What can go wrong?
- What will we do, both to prevent the harm from occurring and in response to the harm or loss?
- If something happens, how will we pay for it?
Risk management provides a clear and structured approach to identifying risks. Having a clear understanding of the potential risks allows our clients to measure and prioritize them and take the appropriate actions to reduce losses.
It is important to note that an effective risk management practice does not eliminate risks; it simply allows us the opportunity to determine the best way to deal with them.
Role of insurance in risk management
Insurance is a valuable risk-financing tool. Few clients or businesses have the reserves or funds necessary to take on the risk themselves and pay the total costs following a loss. Insurance is simply a tool used to reduce the financial loss by providing funding in the event of certain events. These events could include a critical illness, disability, or death that could result in the loss of income required to achieve your financial objectives. Similarly, it could be a loss of a property, business or investments due to fire, theft, liability, tax issues or other material events that you are unable or unwilling to absorb through self-insuring.