Part Two: Risk 101

Personal Insurance

16 Nov

Welcome to Crayon’s mini-series on personal insurance. Throughout this series, we’ll explore how it could work for your family and give tips from our experts to make it easy, actionable and effective.

“Risk is just the odds that something will prevent you from achieving your goals.”

— Morgan Housel, author of “The Psychology of Money”

When it comes to insurance, risk is defined as the chance of something bad happening. There are four choices we can make to manage risks:

Choice	What this means	Example: air travel
Avoid	You don’t do something, so you don’t face this risk	You can remove the risk of dying in a plane crash if you don’t fly
Accept	You choose to live with this risk	You decide to fly and you accept the risk of a plane crash
Control	You take steps to mitigate this risk	You choose airlines with good service records and strict labour rules around how often their pilots can fly or rotate their routes
Transfer	You pass the risk onto someone else	You can’t get someone to”‘fly for you”, but you can take out travel insurance for unexpected losses

Source: Insurance Council of New Zealand

Life is full of curveballs. Lots of bad things could possibly happen, ranging from the inconvenient (e.g., dropping my smartphone and cracking the screen - again) to the life-changing (e.g., being critically injured and no longer able to do current job) to the catastrophic (e.g., the loss of a loved one). It’s worth highlighting that insurance (aka “Transfer”) is just one of four ways you can manage your risks.

It’s simply not feasible to insure everything because it would cost too much. In assessing what to insure, there are two things to consider:

Probability: how likely is the risk to happen?
Impact: how severe would the outcome be if the risk occurred?

As you think about how to spend your insurance dollar best, consider if there are some risks you may decide to accept or find other ways to fund, such as through savings or a revolving credit facility.

In Part Three of the series, we break down the three main types of personal insurance: life, trauma and income cover.

This is part of Crayon’s mini-series on personal insurance:

Now for the important legal part: The information we provide is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as at 15 November 2022.