So let's begin by saying, how do we deal with risk?
Well the first thing is we have to identify the risks that we face.
So what types of risks do families and individuals face?
Well, we face risks to our bodies, we face risks
related to our ability to earn income, and we face risks related to our stuff.
Whether or not something happens to them,
happens to our things, someone takes them from us, they break, so on and so forth.
We also have to think about what the potential loss is to a family.
So if we think about our own health or we think about our own ability to work,
what types of losses would that represent to my household if I became sick?
Or if I died, what would that mean financially to my family.
So not just the loss incurred, but the chances of it happening then too.
Because certainly some losses can be catastrophic to a family, but
they're not very likely to happen.
So we have to put those two pieces together,
as we start thinking about decisions.
And then we choose a method with which to avoid, to deal with it.
The first is, we can avoid the risk.
So, for example, I'll use some common examples we can think about, lets say that
we're concerned about the, the injury happening to us from riding a motorcycle.
Well, the first thing we could do is, we don't ride a motorcycle.
But that may not be exactly what we want in life, so we could avoid it.
We could reduce, or mitigate the loss that we have.
So, for example, we could wear a helmet.
We could drive the speed limit.
We could not drive on rainy days.
There's lots of things we can do to reduce the potential loss from
occurring without entirely avoiding an activity.
We can simply assume the risk.
Where we have money saved up,
if something happens to our motorcycle, we then can purchase a new one.
If we injure it, we have money saved up to deal with health care costs.
So we simply assume that risk ourselves, whatever would happen to us.
And lastly, we can share that risk or transfer it to someone else.
We can ask them to deal with the financial loss of a particular event occurring for
us on our behalf.
And so, this idea of sharing the risk with somebody else, or
partially transferring it to them, is what we often think of as being insurance.