Financial Risk Mitigation

Firstly, what is Risk Mitigation? There is only 4 ways to avoid risk, whether Financial, Physical or Psychological.

Risk Acceptance

Risk acceptance does not reduce any effects however it is still considered a strategy. This strategy is a common option when the cost of other risk management options such as avoidance or limitation outweigh the cost of the risk itself. An individual or company may choose to accept risk in conjunction with other strategies to manage effectively. By understanding the effect of risk Financially, Physically and Psychologically. you are best placed to make better choices and decisions on the best way to manage.

 

Risk Avoidance

Risk avoidance is the opposite of risk acceptance. It is the action that avoids any exposure to the risk whatsoever. It is important to note that risk avoidance is usually the most expensive of all risk mitigation options. In relation to Financial Risk Mitigation the cost is related to the opportunity cost loss. Meaning buy avoiding the opportunity take any risk then you may not reach your fully funded estate potential. If you don’t take some financial risk you may lose potential gains. By avoiding any risk you avoid costs, investment risk, management risk etc. However, avoiding risk means you lose the potential to make gains.

 

Risk Transference

Risk transference is the involvement of handing risk off to a willing third party. In the context of financial risk mitigation can be managed by utilising insurance products and services to ensure capital and cash flow are maintained in the event of unplanned loss (death disability or other financial loss)

In the event of Death (Life cover)

  • Capital to extinguish debt

  • Income to replace loss of future earnings

  • In the event of Disability

    • Capital to extinguish debt

    • Income to replace loss of future earnings

  • In the event of a Medical Catastrophe

    • Cash to meet immediate personal needs

    • Cash to assist with recovery.

The types of cover that provide the outcomes above include Life cover, Total and Permanent Disablement, Income Protection and Trauma. The key is to have the right amount of all these different cover types to provide full risk management outcomes.

Other methods of risk transference could be to contract or utilise other professional services to assist with administration and management of the fund. This does not necessarily transfer the risk but may also be considered as risk Reduction.

 

Risk Reduction

Risk reduction is the most common risk management strategy used by individuals and businesses. This strategy limits risk exposure by taking some action. It is a strategy employing a bit of risk acceptance along with a bit of risk avoidance or an average of both. An example of risk limitation would be having a mixed strategy of all of the above including accepting that to do anything you need to accept some risk, you also need to avoid risk by making decisions you feel are right for you. Adding to this is transferring risks to a third party can mean avoiding risks altogether.

In summary understanding these principles and deciding how you wish to manage them will go a long way to have a strong Risk Mitigation Strategy.

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