Thursday, 16 August 2012

Risk is Manageable: Manage Risk Actuarially

Risk avoidance strategy:  Manage Risk Actuarially

This way is to act, in effect, like an insurance company.

An insurance company will write a life insurance policy without having any idea WHEN it will have to pay out.  It might be tomorrow; it might be 100 years from now.  It doesn't matter (to the insurance company).

The insurance company controls risk by writing a large number of policies so that it can predict, with a high degree of certainty, the AVERAGE amount of money it will have to pay out each year.

Dealing with averages, not individual events, it will set its premium from the AVERAGE EXPECTANCY of the event.  So the premium on your life insurance policy is based on the average life expectancy of a person of your sex and medical condition at the age you were when you took out the policy.  The insurance company is making no judgement about YOUR life expectancy.

The person who calculates insurance premiums and risks is called an actuary; thus calling this method of risk control "managing risk actuarially."

This approach is based on averages of what's called "risk expectancy."

The Master Investor using this way of managing risk is actually looking at the AVERAGE PROFIT EXPECTANCY.

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