Now that we've identified your risks and classified
them, let's look at the various ways you can choose to handle risks.
You can either try to control the risk associated with an event, or
you can plan how you will handle its financial impact. These two general
strategies can be broken down into four main ways of dealing with risk.
Let's look at the ways you might handle the risk
of totalling your car to learn the four ways of handling risk.
Bear the risk: Also called retaining or
assuming the risk. You bear the financial burden and do not actively
seek to reduce the likelihood of the event or its financial severity.
Example: You drop the collision insurance
on your ten year old car. You continue to drive it regularly.
Transfer the risk:
You arrange for someone else to bear the financial responsibility for
the event. Surety bonds, hold harmless agreements, and insurance are
all ways of transferring risk.
Example: You buy collision insurance
on your car so that the insurance company bears the risk of having
to replace or repair your car.
Reduce or control the risk:
You reduce the likelihood of an event and/or you take actions that would
reduce the financial loss if the event occurred.
Example: You wear seatbelts, which would
reduce your injury in the event of an accident, and you do not speed,
which reduces the likelihood of an accident.
Remove the risk:
You go beyond reducing or controlling the risk and avoid it entirely.
Example: You sell
the car and use public transportation.
To check your understanding of these risk management
strategies, match each of the following actions with the risk management
technique it represents.
