Managing risks

The text-book on risk management says that there are three ways of managing risks, namely:

1. Loss control, i.e. loss prevention and loss reduction
2. Loss financing, i.e. retention, insurance, hedging, transfers
3. Internal risk reduction, e.g. diversification

Retention - set aside a sum of money to meet small or frequent losses, e.g. to pay for visits to the neighbourhood doctor.

Loss prevention - measures taken to reduce the frequency of the loss, e.g. keeping a vehicle in good condition.

Loss reduction - measurs taken to reduce the severity of the loss (if it arises), e.g sprinkler system to reduce the impact of a fire.

Insurance is one way of managing risk. It should be reserved for large and infrequent losses.