I remembered my insurance class in Uni. Risk is classified into a few sectors taking into account the probability vs the cost to determine the best way to handle the risk.
So you can, accept the risk and cost, mitigate it, avoid it or outsource it.
Insurance is a method to outsource the risk.
I would put a chart but I'm overseas so I'll insert a chart when I'm back.
High probability of occurrence, low cost
Like getting a flu. Don't insure, just go see the doctor. Accept the cost.
High probability of occurrence, medium cost
Starting a business has high chance of failure.
It's usually a medium cost to start up.
So either avoid starting a business or accept that there is a high chance to lose a medium amount. It can be further mitigated by researching more about the business. But there's no real way to outsource it.
High probability, high cost
Driving at fast speeds when heavily intoxicated.
High chance to meet with an accident, high possibility of death.
Do not do it. Avoid it.
Medium probability, low cost
Falling down and spraining your ankle.
This is not as common as the flu, but seeing the doctor is not very expensive.
So no action needs to be taken. Just accept the risk, cos the cost is low.
Medium probability, medium cost
Betting on the blackjack table.
The decision may depend, you may avoid it, or accept it in this case
Driving accidents. You can avoid it by not driving, or if you drive, then you insure and outsource it.
Medium probability, high cost
Getting a critical illness. According to statistics, there's a 30% chance to get a CI. Cancer, stroke, heart attack. Very common ailments. I'm sure you know of someone who has had it. The cost for treatment is very high.
So the decision is to insure. Insurance would be expensive but it would be better than not being insured if the time ever comes.
Low probability, low cost
Like when a friend or family member wants to stay over.
Since it's a low probability, and the cost is just for the friend to just use my master bedroom bathroom to bathe if necessary. It's only a slight inconveniences. Just accept the inconvenience.
Getting another water could be seen as buying insurance for this occurrence.
Low probability, medium cost
Some workplaces are higher risk. Let's look at a financial institution's back office. Usually just paper work, so not much risk of accidents. But sometimes, a staff may try to reach a higher location by standing on a chair with wheels.
In such a scenario, the decision could be staff training for workplace safety, which would mitigate the risk, or insurance, to pay for medical expenses due to accidents or both.
Low probability, high cost
Fire in the house. Quite rare in Singapore, but if it ever happens, then it will be very expensive to repair. So should insure, cos insurance is cheap due to low probability. Outsource it.
The probabilities have been loosely defined as :
High probability = it will most likely happen.
Medium probability = I know of such incidences happening around me.
Low probability = it will probably not happen.
Of course the probability differs from person to person, based on different circumstances.
If we look at the chart, we can easily decide whether to do certain things based on the probability vs this cost.
Can you afford the loss? If not, then don't do it. If you can't avoid it, then insure it.
Or if it happens often and the cost isn't very high then just accept the cost.
I found this lesson quite interesting cos it taught us how to react to different situations. Not every situation needs a reaction. For some things you can just let it be and accept the cost yourself.
So next time when your financial planner sells you something, you may want to consider referring to this chart. Cos there may be some situations where you might not want to do anything about it. Or it may even help with your investments to help you decide what to do during certain market conditions or issues with a particular company.
Hope this post has been useful for you.
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