Don't throw caution to the winds; Play with its direction ….

Life is full of uncertainty, and it is this ambiguity that causes risk. Risk is nothing but an unfavourable outcome of an event. Risks can throttle any good financial plan. Imagine a situation where a person aged 40 has made an excellent retirement plan. He has made investments in assets that will mature exactly at the time of his retirement. There are sufficient tax benefits available for investing in those retirement plans. He has nominated his wife as the beneficiary. The arrangement is inflation proof. All in all, an excellent plan. Unfortunately, he dies at the age of 42, leaving his wife and children either with no assets or assets that will mature after 18 years -that is, at the age he would have retired, had he been alive, For the next several years his family will have to live in financial distress. This is an example of excellent retirement planning, but poor risk management.

Let us look at another case where a person has an excellent life insurance. In the event of his untimely death, his family would get a large sum of money. This corpus could be utilised to take care of the family for several years. Unfortunately, this person suffers from a heart attack. There is no health insurance and the entire cost of treatment has to be borne by the family. The family would now have to borrow funds for his treatment.

Financial planning without proper risk managment is incomplete. A risk management will get replenishes the financial loss suffered owning to the unfavourable outcome of an event

Risks There are two kinds of risks : speculative/investment risk and pure risk. Speculative/investment risk is one where there are three likely outcomes: gain, status quo and loss. When we invest in the stock market we can either gain or loose or there could be no gain/no loss situation. This is called speculative/investment risk. For this type of risk theire is no insurance product. Pure risk has two likely outcomes: status quo and loss. While driving on the road there are only two possible outcomes, there can either be an accident or there cannot be an accident. This means their is either loss or status quo. For loss suffered from pure risk there are different kinds of insurance policies.

Types of pure risk Personal risk: This is the risk that affects the income earning capacity of an individual. For example : death, disability, illness, accident, unemployment and son on.

Liability risk: This risk exposes an individual to the third party. For example: an individual to the third party. For example: an accident while driving a car, negligence by a prodessional and so on . Failure by other; We are also exposed to risk that can be caused to us owing to the failure of others. For example, while passing below a building under construction, a brick falls on a person.

Rules of risk management While evaluating risk, the following rules must be kept in mind; Don't risk more than what you can afford to loose, Consider the impact of a risk. If the impact is going to be fatal or unbearable, it is prudent to insure the risk. For instance, the death of an earning member of the family can prove fatal to the financial health of the rest of the family members. This is a loss that the family cannot afford to risk. Therefore, it is important to insure the life of an earning mumber.

Consider the odds of a risk occuring, If the probability of the risk occuring is high insurance may not be the solution. For instance, if a corporate has a factory in low lying area which gets flooded every year, it is recommended to move the factory to another, more safe area. In this case, insurance may not be the solution.

Don't risk a lot for too little, If the cost of acquiring insurance is very low compared to the potential loss, then it is recommended to undertake insurance.

Risk Management techniques There are basically two risk management techniques: risk control and risk financing. Risk Control: There are two ways in which the risk can be controlled. The first is risk avoidance - If a father is worried about his son's car driving habits, he could ask his son to stop driving the car. This will ensure that the risk of an accident is avoided.

• The second is risk reduction - If the car driving cannot be stopped completely, the father can ensure that his son wears a seat betls and also has speed restrictions. This will reduce the risk of an accident.

  Risk Financing : If risk cannot be controlled, it is prudent to ensure that in the event of a risk occuring there is a mechanism in place to make good the financial loss. There are two methods of risk financing. The first is risk retention- if the severity of financial loss is not high and where frequency of occurrence is high, it is better to retain risk. For instance, a company which provides medical benefits to its employees may decide not to opt for insurance for smaller sicknesses like coughs and colds. The company will itself bear the cost treatment for its employees.