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What is Risk Mitigation?

IndianMoney.com Research Team | Posted On Tuesday, March 24,2009, 05:26 PM

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What is Risk Mitigation?

 

 

Risk Mitigation :

Risk mitigation measures can be directed towards reducing the severity of risk consequences, reducing the probability of the risk materializing, or reducing the organizations exposure to the risk. Risk management is the transfer of risk from yourself to another party (Insurer).You pay a premium and transfer risk to the Insurer.

How does risk affect your life and financial well being?

You are the breadwinner of your family .If you die then your family will have no source of income. This would change their life style. Your children’s education and marriage would be held up and your family would be in difficulty.

You cannot predict the future or change it .But you can prepare for it and insure for it. You transfer the risk of you not being alive to provide financially for your family to the Insurer (life insurance Company) in exchange for a premium.

The Insurer bears the risk that you would not be there to provide for your family and it provides them a sum assured (in case of term insurance policy) or a (sum assured + bonus) in case of an endowment policy.

There are 2 types of Insurances:

Life Insurance:

General Insurance:

Personal accident policy, Health policy, Home Insurance, Car and Two wheeler insurance, Property and business insurance.

You can transfer the risk of the damage your car or two wheeler suffers in an accident or it being stolen to the General Insurance Company.

Your loss in income and medical and hospitalization costs if you suffer an accident is covered by an accident insurance plan.

The medical and hospitalization costs are covered by a Comprehensive health policy and a critical illness cover.

The damage to the structure of your house and the theft of its contents can be covered by a home insurance policy.

Damage to the location of the business and on job injuries to your workers is covered by business insurance.

How much risk should you transfer to the Insurer?

You have to decide how much life insurance you need to have so that your family can live in comfort (lead the same lifestyle they currently lead).

If you insure (take a term policy or endowment policy) with a less sum assured your family might not have a sufficient amount to lead their lives in case of your untimely demise.

By underinsuring yourself you bear the risk yourself instead of transferring it to the Insurer. The same logic holds true for your health, home, business or auto insurance policy.

What happens if you over insure yourself?

You needlessly bear the premiums and if nothing happens (you have no liabilities) then you lose this money
In life insurance you can insure only your life or your family’s life (children/parents) and not your neighbors’ life. The loss should be yours.
The same holds true for your property (home) as well as business and health.

Insurance cannot be taken for a profit. It works on the no profit/no loss basis. If your car is damaged in an accident the insurer pays for its repairs. If your car is stolen or fully destroyed (say in a fire) then the Insurer pays you (Cost of the car – depreciation) depending on how old the car was.

If your contents are damaged say a washing machine you are given a washing machine or similar life. You will not get a new washing machine as Insurance does not allow you to profit from it.

You cannot Insure your business against loss in profits .The vary nature of a business entails loss or a profit. You cannot just close your shop/business without doing anything and collect insurance for the loss.

You need to make a disclosure (give all relevant facts) as insurance is made in good faith (trust).If you are found not making all the relevant disclosures then your policy will not pay the damages(claims) to you or your family.

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