Methods of Handling Risk

MR. WATSON: Let's talk about ways to handle risks now. There are four ways to handle risk, we call them A.R.R.T.

 

MR. WATSON: Jason is scared of flying. Ever think about that, Jason?

JASON: Yeah.

MR. WATSON: He thinks, "Ok, Big Dog, I'll play along." How can Jason handle the chance of dying in a plane crash? We are talking about treatment of, or handling risks. What could he do? What does the "A" stand for? AVOID.

MR. WATSON: Jason, avoid flying.

MR. WATSON: Jason, when you go to Paris on Friday night, avoid flying. Is this going to happen?

JASON: Probably not. I would have to take a boat and I am afraid of drowning.

MR. WATSON: There was a man; he was a coach for the Oakland Raiders, John Madden. He gave up coaching because he hates to fly. He rides in a bus. They give him a bus after every game, and away he goes. The only way John Madden will die from an airplane crash is if one lands on the bus. How does he handle dying in an airplane crash? He avoids it.

MR. WATSON: So Jason is not going to avoid flying. What else can he do? What does the "R" stand for?

STUDENT: REDUCE.

MR. WATSON: The "R" stands for what? Reduce it. By doing what? Not fly as much. Being cautious. Does that make sense?

MR. WATSON: Some of us get on the plane, but we reduce the chances. We may look at the pilot. If he has a patch over one eye or looks like Captain Ron, we get off. If there is a tire that looks like a "may-pop," it may pop at any time, you look at those tires, you get off. So you are reducing it. Right? Most of us can't avoid it, so we try to reduce the risk.

MR. WATSON: Sometimes we'll retain the risk. When will we retain the risk? When we self-insure. Here's a story:

MR. WATSON: Lisa and I are married. Does she care where that money comes from if I were to die? She needs money desperately. Does she care? No. If I had it buried in buckets out back in a barn, would she care? No. All she would need is what? A shovel and a map.

MR. WATSON: Do you care where that money comes from, Lisa? No. She just wants to pay the bills. So some people who are wealthy, they have enough money, they don't need insurance. They've got all the money they need. They feel like, okay, if the event happens, they will handle it financially. They have decided to retain the risk. Driving without insurance is retaining the risk. Wearing an expensive Rolex without having insurance on it is retaining the risk. Does that make sense?

STUDENTS: Um-hmm.

MR. WATSON: Meeting the risk head-on is an example of what?

STUDENTS: Retain.

MR. WATSON: Self-insuring is an example of which one? Retaining. Meeting it head-on.

MR. WATSON: Buying insurance is transferring the risk. Buying auto insurance or life insurance is transferring the risk. I pay the insurance company a premium and in return they promise to pay a dollar amount. I transferred it. I bought insurance.

MR. WATSON: There are four ways to handle risk: A.R.R.T.:

• Avoid
• Reduce
• Retain
• Transfer

MR. WATSON: Got it?

STUDENTS: Yes.

Review

MR. WATSON: Is most insurance sold through group or individuals? By individuals, through agents.

MR. WATSON: There are two types of risks. What are they?

STUDENTS: Pure risks and speculative risks .

MR. WATSON: Pure and speculative. Which one has a chance for loss or gain?

STUDENTS: Speculative .

MR. WATSON: Which one has a chance only for loss?

STUDENTS: Pure .

MR. WATSON: Which one can we insure?

STUDENTS: Pure .

MR. WATSON: There are three types of hazards. Give them to me in order, not that it makes any difference.

STUDENTS: Physical, Moral, and Morale.

MR. WATSON: What kind of hazard is a bad attitude? Morale.

MR. WATSON: There are four ways to handle risks. What are they? A.R.R.T.

MR. WATSON: What does the A stand for?

STUDENTS: Avoid.

MR. WATSON: The R

STUDENTS: Reduce

MR. WATSON: The R

STUDENTS: Retain

MR. WATSON: The T

STUDENTS: Transfer