There are FOUR (4) ways to handle risk. Please explain and give example.

Every risk we face can be addressed in one of four ways which is avoidance, reduction,
transfer and retention.

First, avoiding risk. Avoidance may be appropriate for a limited number of risks that
produce a high probability of loss, such as gambling, but it is not a practical solution for most
risks. In some cases, we may even create additional risks by trying to avoid a particular risk. For
example, we may be tempted to keep all of our savings in cash to avoid the risk of investment
losses, but then we would be subjecting ourselves to the potential risk of loss by inflation, which
is practically guaranteed to significantly erode the value of our cash over time.

Second, reducing risk. If we are unable or unwilling to avoid an activity, we can take
steps to reduce the probability and potential severity of loss associated with the activity. For
example, when we choose to drive, we can reduce the risk of being involved in an automobile
accident by observing the speed limit and other traffic laws, not texting while driving, and not
driving while drowsy or drunk.

Then, transferring risk. Another way to deal with risks we are unable or unwilling to
completely avoid is to transfer them to a third party. We can transfer risk in several ways, but the
most practical, cost-effective, and common approach for high-severity risks with a low
probability of occurrence is through insurance. The most effective use of insurance is to cover
only the unlikely potential losses which would financially devastate us if they occurred. In these
areas, we should seek to maximize our protection and minimize the cost.

Last but not least, retaining risk. Retention is the most suitable approach when the
potential severity of a loss is low, regardless of how frequently it is expected to occur, or if the
cost of ensuring the risk would be higher over time than the actual potential loss incurred. For
example, under the terms of replacement plan, to receive a replacement phone would have to pay
a deductible of about half the original cost of the phone. So, I decided that if something did
happen to my phone, it would not hurt too much to simply buy a new one, so I chose to retain the
risk ourselves by not purchasing the replacement plan.