Risk Management
July 15th, 2010 | 
Author: 
In risk management, we need to realize that all things in this world are at risk for damage, including ourselves. Therefore, we need to analyze what are risks that exist, how much chance of any such occurrence, along with how big losses will be experienced. For the risks that could cause large losses or have a high chance, we need to prepare a plan of anticipation for our regular lives do not let too much annoyed if damage occurs. As an example, consider the following story:
Emergency Fund
Emergency fund is the amount of money you intentionally set aside for use in an emergency. These funds typically stored in the form of savings with the special account should not be withdrawn if not in an emergency. The advantages of emergency funds are that these funds are your savings. Money in emergency funds will still be yours if not catastrophe. And you can use this money for anything you want. Meanwhile the lack of emergency funding is needed discipline to periodically save the money to the account of an emergency fund. And discipline is also necessary to enable an emergency fund is really saved, not drawn for daily necessities. However, the biggest shortage of emergency funds is the limited amount of money can you save as an emergency fund. In cases like James above, emergency funding would not be enough to replace all the financial losses suffered by James. In this case, you need to consider other ways of risk management.
Transferring Risk to others
Another way to anticipate the risk is by way of transferring risk to another party. This can be done by purchasing insurance. In the insurance agreement, you give up some money, called premiums to the insurer (insurance company) and the insurer promises to pay the compensation to you if you are having troubles. The advantages of this method are that you will receive compensation in large numbers in case of disaster. With a good insurance plan, James does not need to spend one penny of personal money to cover all financial losses mentioned above. The downside is the risk borne by the insurance agreement is limited to insurance policies. Let’s say the insurance agreement only covers the losses from death, and then the insurers will not provide indemnity for the cost of hospital care.
In addition, the insurance agreement also has a time limit (usually only applicable year).
If within that period not happened, then the premiums you paid will be scorched.
Ironic indeed, on the one side you need a large amount of compensation if you are having troubles. But on the other hand insurance policies require a high cost. Therefore you need to analyze your own needs. You need to define themselves what risks to be borne by insurers, and any risks that could be addressed with emergency funding.
Posted in Management