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The 3 ‘A’ of risk management that can simplify insurance decision making

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Mon, 30 Aug 2021 Source: Yaw Banahene

Two truths seem to hold when it comes to insurance:

1. People like being insured, and

2. People don’t like paying insurance premiums.

Often, decisions on managing risk are influenced by these two factors alone. The the trouble with this is that often people end up over insuring or under insuring or with the wrong type of insurance cover altogether.

A better way could be by using something I call the 3 ‘A’s of risk management: Avoid, Assume, Assign. Let’s walk through each of them.

AVOID

Where it is possible, this is the cleanest, most straightforward way to handle risk. Simply avoiding situations that bring on unwanted risk is a perfect way to insure against loss. Don’t want to face a significant risk of losing a limb to an alligator?

Don’t wrestle alligators!

A lot of the time(s), though, risk avoidance is either not desirable or not practicable. I, for example, drive to most places. In my case, I’m NOT going to avoid some of the risks inherent to driving because I WANT to drive. Obviously, many steps are taken along the way to mitigate the risks, but complete avoidance is not an acceptable option to me.

Similarly, some risks cannot be avoided because they are pretty much entirely out of our control. Becoming disabled in a car accident or ill from COVID are substantial risks that ( add- we take daily) while we might take steps, i. e. (wearing seat belts, regular hand washing, etc.) to mitigate the risk(s), to avoid such risk(s) is ultimately out of our hands.

ASSUME

Each day, we assume risks. More often than not, we do not pay much attention to these instances for two reasons:

• We can afford the consequences, and

• The consequences aren’t particularly dire.

The risk of a paper cut doesn’t stop me from filing the forms I need to submit on my job. The risk that I may hit a traffic jam and be late to a meeting. These are all risks that fall firmly into the ‘Assume’ category all the time for most of us.

ASSIGN

Risks that we can’t totally avoid, but we also can’t afford to assume, fall into the ‘Assign’ category. How we assign risk can vary. There are a few ways to assign risk. Some scenarios are giving below (transfer)

1. By purchasing insurance, you are transferring (Assigning) the risk to a risk pool managed by an insurance company in exchange for an agreed premium.

For instance, when you purchase insurance on your home, you transfer (the) risk associated with homeownership to the insurance company per the terms of your insurance contract.

2. Another scenario is an apartment complex manager hiring a security company to ensure the (safety of) residents' perhaps due to several recent break-ins in the area. However, in this example, the security guard on duty neglected his post for a length of time, resulting in the robbery of one of the residents or a guest on the property. That individual may choose to sue the apartment complex for their injuries and stolen belongings. Contractual risk transfer would have allowed the risk to shift to the security company – the party most able to control the risk.

EFFECTIVE USE OF THE THREE ‘A’s

When making decisions about insurance, it’s important to make sure you have considered all three – Avoid, Assume, Assign – in your process. When you think about risks using this framework, which of these three pitfalls can you relate to?

1. Assigning risks you could assume

It is not every risk that you have to assign. Not assigning a risk means you are taking full responsibility for the consequences of that risk. Some risks are perfectly okay to assume because the consequences are very low. For instance, imagine being offered(a) purchase protection on a GHS10 phone plug.

Even though these insurance types are available, at the end of the day, the risk of a phone charging plug going bad is something I’m willing to take my chances on (i.e., ASSUME the risk). Yes, it’s not a big deal if I pay the extra GHS 2 to have my charging cord protected. But adding insurance on things I don’t really need to insure will cost me more money over the long term.

2. Assuming risks, you could avoid

I find people usually do a good job at this. Sometimes through negligence or ignorance, we take on unnecessary risks in our daily personal or business activities.

Most of these risks are usually easily avoidable.

That said, some reminders always come in handy;

o Wear nose Masks in crowded settings

o Buckle up while driving

o Do not drive under the influence of alcohol or drugs.

3. Assuming risks, you could assign

We see this a lot. Some of the most significant risks we see left unassigned are:

o Loss of income due to disability: If you make GHS 50,000 per year and have 20 years left until retirement, the value of your future income is approximately GHS1 Million. That’s a risk that most people can’t afford to assume, yet most folks are either woefully unaware of what they have for disability insurance or none at all.

o Uninsured Homes and property: Another area rife with neglect is the world of home insurance. It can be complex and wrought with people who end up underinsured (because they haven’t calculated or do not understand their home's insurance value) or with no insurance because they do not appreciate the risk they are assuming not assigning.

o Loss of Business Income: Most business owners or managers of businesses purchase property insurance to cover the cost to repair or replace a building or equipment that’s been damaged due to a covered peril. But too many business owners fail to think about how they would keep their business afloat if they were forced to close temporarily. Business interruption (consequential loss) insurance coverage would replace the net profit that would have been earned if your organization was not forced to stop operations due to the covered physical loss.

So don’t sweat it when it comes to making insurance decisions. Follow the 3 ‘A’s ( or call your Risk manager/insurance broker), and you’ll be well on your way to ensuring your risks are correctly managed.

Columnist: Yaw Banahene