There are four risk management techniques

1. risk avoidance
2. loss control
3. risk retention
4. risk transfer

These techniques work for pure risks (chance of loss but no chance of gain) but not speculative risks (chances of gain or loss, as with stock market). Insurance reduces uncertainty about nonspeculative financial losses. There are requirements for insurable risks.

Risk Avoidance

• elimination of risk at any cost (e.g., drop a hazardous product)
• most aggressive and effective … but not practical
  • eg, staying in bed all day to avoid risk of injury or death

Loss Control

• loss prevention: reduce frequency of loss
  • usually impossible or impractical
    • (e.g., to maintain income —> insurance or adopt a healthier lifestyle
• loss reduction: reduce the severity and financial impact
  • eg, upon disability —> physical rehabilitation, crosstrain a backup
• safety measures, pooling, segregating (e.g., key employees travel separately), diversifying (not imperiling group by one member’s actions)

Risk Retention

• finance some or all of the losses yourself
  • eg, health insurance has deductibles and waiting period
• eg, buy Long Term Disability but not Short Term Disability

Risk Transfer

• noninsurance
  • eg, relatives help out
• insurance
  • formal arrangement between you and an insurer