Table of Contents
Table of Contents

5 Basic Methods for Risk Management

As people begin to age, they usually encounter more health risks. Managing pure risk entails the process of identifying, evaluating, and subjugating these risks—a defensive strategy to prepare for the unexpected. The basic methods for risk management—avoidance, retention, sharing, transferring, and loss prevention and reduction—can apply to all facets of an individual's life and can pay off in the long run. Here's a look at these five methods and how they can apply to the management of health risks.  

Key Takeaways

  • Avoidance means not participating in activities that could harm you; in the case of health, smoking is a good example.
  • Retention acknowledges the inevitability of certain risks, and in terms of health care, it could mean picking a less expensive health insurance plan that has a higher deductible rate.
  • Sharing risk can be applied to how employer-based benefits are often more affordable than if an individual gets their own health insurance.
  • Transferring risk relates to healthcare in that the cost of the care is transferred to the insurer from the individual, beyond the cost of premiums and a deductible.
  • Loss prevention and reduction are used to minimize risk, not eliminate it—the same concept is used in healthcare with preventative care.


Avoidance is a method for mitigating risk by not participating in activities that may incur injury, sickness, or death. Smoking cigarettes is an example of one such activity because avoiding it may lessen both health and financial risks. 

According to the American Lung Association, smoking is the leading cause of preventable death in the U.S. and claims more than 480,000 lives per year. Additionally, the U.S. Centers for Disease Control and Prevention notes that smoking is the No. 1 risk factor for getting lung cancer, and the risk only increases the longer that people smoke.

Life insurance companies mitigate this risk on their end by raising premiums for smokers versus nonsmokers. Under the Affordable Health Care Act, also known as Obamacare, health insurers are able to increase premiums based on age, geography, family size, and smoking status. The law allows for up to a 50% surcharge on premiums for smokers.

Risk management strategies used in the financial world can also be applied to managing one's own health.


Retention is the acknowledgment and acceptance of a risk as a given. Usually, this accepted risk is a cost to help offset larger risks down the road, such as opting to select a lower premium health insurance plan that carries a higher deductible rate. The initial risk is the cost of having to pay more out-of-pocket medical expenses if health issues arise. If the issue becomes more serious or life-threatening, then the health insurance benefits are available to cover most of the costs beyond the deductible. If the individual has no serious health issues warranting any additional medical expenses for the year, then they avoid the out-of-pocket payments, mitigating the larger risk altogether.

Basic Methods for Risk Management

Investopedia / Eliana Rodgers


Sharing risk is often implemented through employer-based benefits that allow the company to pay a portion of insurance premiums with the employee. In essence, this shares the risk with the company and all employees participating in the insurance benefits. The understanding is that with more participants sharing the risks, the costs of premiums should shrink proportionately. Individuals may find it in their best interest to participate in sharing the risk by choosing employer health care and life insurance plans when possible.


The use of health insurance is an example of transferring risk because the financial risks associated with health care are transferred from the individual to the insurer. Insurance companies assume the financial risk in exchange for a fee known as a premium and a documented contract between the insurer and individual. The contract states all the stipulations and conditions that must be met and maintained for the insurer to take on the financial responsibility of covering the risk.

By accepting the terms and conditions and paying the premiums, an individual has managed to transfer most, if not all, the risk to the insurer. The insurer carefully applies many statistics and algorithms to accurately determine the proper premium payments commensurate to the requested coverage. When claims are made, the insurer confirms whether the conditions are met to provide the contractual payout for the risk outcome.

Loss Prevention and Reduction

This method of risk management attempts to minimize the loss, rather than completely eliminate it. While accepting the risk, it stays focused on keeping the loss contained and preventing it from spreading. An example of this in health insurance is preventative care.

Health insurers encourage preventative care visits, often free of co-pays, where members can receive annual checkups and physical examinations. Insurers understand that spotting potential health issues early on and administering preventative care can help minimize medical costs in the long run. Many health plans also provide discounts to gyms and health clubs as another means of prevention and reduction in order to keep members active and healthy.

Article Sources
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  1. American Lung Association. "Health Effects."

  2. Centers for Disease Control and Prevention. "What Are the Risk Factors for Lung Cancer?"

  3. U.S. Department of Health. "How Insurance Companies Set Health Premiums."