Risk management is a serious issue to consider for any business owner or homeowner. Wile the details of a particular situation can be complex, I want to show you a simple way to look at it. Here are 5 basic questions to ask yourself about the potential of possible losses:

1. How can I avoid the Risk?

Can your risk actually be avoided? When you are thinking about your potential risk of losses, can you actually just avoid the risk altogether? For example, if you know cooking with your grill inside will likely cause a fire, then you could choose to cook outside instead. If you can avoid the risk, avoiding it may be better than buying insurance. A simple example of avoiding a possible Liability Loss is: Don’t Drink and Drive.

2. Is the Risk controllable?

Are there risk management procedures you could implement that will control to the potential of a loss? A great example would be safety wear for certain activities such as glasses, gloves, or protective clothing. When you mow your yard, do you wear the proper shoes, gloves, and eye protection to avoid an accident? If you can control the risk, you may not need insurance or as much insurance.

3. How much of the Risk can you retain?

Maybe you can’t avoid the risk, but you can limit it. When you know the risk exists, you can calculate out how much of the loss you can personally retain. But the risk still exists. How much you can retain depends on the Risk, but one way is to raise your deductibles on your insurance policies or pay small claims from your own pockets.

4. Can the Risk be transferred?

We can use contracts or help transfer the risk to another party. A good example is when you have a contractor working on your building, asking them to list you as an Additional Insured on their insurance policy will help transfer some of the risk to his insurance carrier. We see this all the time when we rent vehicles. The rental company wants to transfer some of the risk to you by having your sign their contract. This helps protect the rental company’s assets, but it opens you up to a number of possible financial losses.

5. Can I buy insurance on this Risk?

This is the most common form of transferring risk to another party, but as you can see, it is not the only kind. Insurance is used to help reduce your financial loss when the other forms are just not possible or financially feasible.

As our culture evolves, new risks appear and insurance companies develop new products to address them. Each new risk will need to be addressed by using the questions above. Sometimes, you will be able to something about the risk without purchasing insurance; other times, the risk is so new that you do not know the potential of loss, so you purchase insurance to help protect yourself or your business.