Avoiding Risk vs Reducing Risk in Insurance

21.11.2018
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Avoiding Risk is very different from Reducing Risk. Let’s understand it with an example. Suppose James has a car and has an insurance policy for it. James double checks everyday that the car is in perfect condition. He ensures that air pressure in the tires is appropriate, brake oil, engine oil, oil filter, front and back lights, car battery etc are always well maintained. James also drives the car following all the traffic rules to the best of his ability and remains extra vigilant to avoid accident even if someone else on the road makes mistake. What is James doing? He is “reducing” the risk of an accident with all these practices. That way his car won’t get hit and he won’t have to claim insurance although he has the insurance policy. James has a friend Billy. Billy has no car because he did not buy one and the reason Billy gives for it is he wants to “avoid” all sort of risks with the car. He won’t need to reduce the risk in such a case for the car because he has completely avoided the risk by not buying a car. So he does not need insurance policy for the car in this case since insurance covers risk and Billy does not have a risk to be covered since he has avoided it.

Hope it makes sense.

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