No, no, not the Da Vinci, Van Gogh or Michelangelo type of ART, but A.R.R.T. This acronym outlines the 4 ways to manage risk. Buying insurance is only one way to manage risk but did you know there are 3 non-insurance ways to manage risk in your personal life; Avoid, Reduce, Retain.
AVOID: This one is pretty straight forward. If you don’t participate in a particular activity or own a particular property, you eliminate the risk all together. This method is the easiest to execute but it can be the hardest to resist. Here are just a few examples of avoiding a risk:
• Not licensing a teenage driver who is clearly irresponsible
• Not buying a backyard trampoline because it is impossible to prevent neighborhood children from using it and potentially hurting themselves
• Not going skydiving (I’ve always wanted to do this, though!)
REDUCE: Obviously we cannot avoid everything, otherwise, we would never leave the house or cross the street. That’s why the next way to manage risk is to reduce it. Most of the time reducing risk is just a matter of using common sense and actually doing the things you know you should be doing in the first place.
• Having your chimney cleaned every year to reduce the chance of a fire
• Checking the prongs on your diamond engagement ring to reduce the chance of losing the stone
• Not drinking and driving to reduce the risk of a car accident
RETAIN: The third and final non-insurance way to manage risk is to pay the loss out of your own pocket, or retaining it. Most people retain risk when they carry a car insurance deductible or when they don’t buy earthquake coverage for their home in Lancaster County PA. However, retaining risk is only good when it is intentional. Unintentional retention of risk is bad news because you’re not aware the risk exists in the first place and you likely don’t have the money to pay for it. Some examples of unintentional risk include:
• Not having any coverage to repair or replace your finished basement after your sump pump failed and the overflow water damaged it
• Only receiving $1,000 after your $5,000 engagement ring gets stolen
• Not having any coverage to protect against a lawsuit when a customer visits your home-based business and falls on your icy sidewalk
TRANSFER: The final way to manage risk is to transfer the risk from you to another party. Buying insurance is the most common type of risk transfer. With insurance you pay a predetermined premium and in return the insurance carrier absorbs the losses that you otherwise would have to pay. Insurance makes the most sense when the risk is large but the cost to transfer the risk is small. Here are just a few examples when it makes sense to buy insurance:
• Transferring the risk of rebuilding your $200,000 home after a fire for a few hundred dollars
• Getting coverage for your $30,000 SUV if you are at fault for damaging your own car
• Buying liability insurance to protect your assets from a lawsuit
Insurance really is a piece of A.R.R.T. because insurance is the Transfer of risk. However, it is important to understand that risk can also be managed by using non-insurance methods too. That’s why your insurance agent should always explore all options to manage your personal risk and help you identify the unintentional retained risks that you may not even be aware of.
Do you have an ARRT masterpiece to manage risk or do you need to get the paint brush out for some touchup? Please leave a comment below.