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Methods of Risks Management

There is no escape from the presence of risks, and mankind must accordingly seek ways of dealing with it. The existence of risk is a source of discomfort to most people and the uncertainty which accompanies risk is a cause of anxiety and worry. Since risk is distasteful and unpleasant, a rational person attempts to do something about it. There are five methods of risk management which are discussed below:

1.    Avoid Risk. Risk is avoided when the individual refuses to assume the risk even for a moment. This is accomplished by merely no become involving in the action that gives rise to risk. The avoidance of risk is a method of dealing with risk, but it is a negative rather than a positive technique.

2.    Assume Risk. When the individual does not take positive action to avoid, reduce, or transfer risk, he assumes the possibility of loss involved in that risk. The risk assumption may be involuntary or voluntary. Voluntary risk assumption is characterized by the recognition that risk exists, and tacit agreement to some possibility of loss involved. The decision to assume risk voluntarily is made because there are no more attractive. Involuntary risk assumption takes place when the individual exposed risk does not recognize the existence of that risk. In these cause the persona so exposed assumes the financial consequences of the possible loss.

Risk assumption is a legitimate manner of dealing with risk ; in many cases it is the best way. Each person must make a decision as to which risks he will assume and which he will seek to avoid or transfer on the basis of his margin for contingencies or his ability to stand the loss. As a general rule, the risks that should be assumed are those which involve relatively small losses which are almost certain.
3.    Transfer Risk (Hedging). Risk may be transferred form one individual to another who is more willing to bear the risk. An example of the transfer of risk is the process of hedging, a method of risk transfer accomplished by buying and selling for future delivery, whereby dealers protect themselves against a declining or increasing market price between the time they buy a product and the time they sell it. It involves simultaneously purchase or sale for immediate delivery and purchase or sale for future delivery, such as the sale of wheat in the futures Market at the same time that a purchase is made in the spot market.
             Insurance is also a means of shifting or transferring risk. In consideration of specific payment (the premium) by one party, the second party agrees in a contract to indemnity the first party upto a certain limit for the specified loss which may or may not occur.

4.    Share Risk. One outstanding example of a device through which risk is shared si the company form of business organization. Under this form of business organization, the investment of a large number of persons is pooled and thereby the risk is spread over a large number of shareholders. Insurance is another device designed to deal with risk through sharing. Once basic characteristic of the insurance device is sharing of risk by members of the group.

5.    Reduce Risk. Risk may be reduced in two ways. The first is through loss prevention and control. Safety programmers and loss prevention measures such as medical care, fire department, night watchmen, sprinkler system, and burglar alarms are all examples of attempts to deal with risk by preventing the loss or reducing the chance that it will occur.

In addition to reduction of risk through loss prevention activities, risk can be reduced in the aggregate through these of the law of large number. Though the combinations of a large number of exposed units, a reasonable estimate of the losses can be made. On the basis of this estimate, it is possible for an insurance company to assume the possibility of loss of each exposure, and yet not face the same possibility of loss itself.

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