As we look ahead to 2024 STP client meetings (click here to read April’s article), it is important to refine our understanding of risk management. Often, insurance and risk management are used interchangeably, and terms like "protection" can be misleading. We propose a more precise approach.

We face risks daily and manage them using four main strategies, summarized by the acronym ACAT:

Avoidance: Completely avoiding the risk when possible.
Control (or Mitigation): Reducing the likelihood or impact of the risk.
Acceptance (or Retention): Accepting certain risks when avoidance or control is impractical.
Transfer: Transferring the financial consequences of a risk, typically through insurance.

Consider a typical morning scenario: driving to work. Here's how ACAT applies:

Avoidance: Staying home avoids the risk of a car accident but is often impractical.
Control: Driving cautiously and minimizing distractions controls the risk.
Acceptance: By driving, we accept the inherent risk of an accident. Insurance does not reduce this risk.
Transfer: Car insurance transfers the financial risk of an accident to the insurer, though we retain some risk through deductibles.

The financial industry emphasizes risk transfer, but many significant risks, such as those related to health and lifestyle, cannot be transferred and instead are best managed through personal choices and behavior change.

Our goal in financial planning is to help clients make intentional decisions that align with their long-term priorities. Risk management is a key part of this process, and it goes beyond just purchasing insurance. By understanding and applying the ACAT framework, we believe clients will be better equipped to navigate daily risks and protect their well-being and financial health.

We look forward to our upcoming conversations to navigate this with you in the fall.