Financial Risk Management techniques

There are four risk management techniques

risk avoidance loss control risk retention 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.

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 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) noninsurance insurance