Risk management is a continuous process of management that aims to identify business, personal, and familial risks. First, it assesses the risks of the potential damage’s intensity and prioritizes the order in which the segments should be dealt with. Then, it identifies goals, points that need to be improved, and the investment needed to improve them.
The risk management process in the family and business unit changes over time, with new variables entering the risk equation and old risks, which no longer exist, leaving the equation.
The goal of risk management is to reduce the risks’ effect on achieving the personal and business objectives. Risk is defined as an unpredictable variable that might occur, resulting in financial losses due to unplanned costs that were not priced and taken into consideration in the business or family unit’s planning.
Financial risk management is an integral part of risk management. It includes various topics that affect various areas: financial risk, credit risk, economic risk, and insurance risk. Financial risk management also requires a clear definition to measure and reduce it. Many financial risks can be hedged via suitable financial instruments (e.g., derivative options) and protection against insurance risks by buying products through the various insurance companies (e.g., directors insurance). These protections usually entail costs; the cost structure should always be managed, and the risks should be continuously priced. As risk managers, our job at Sparta Capital is to analyze and estimate the required protection level for that particular risk and recommend the appropriate protection level.
Risk management in the life of the family or the business is important in nearly every point of decision: taking a bank loan to increase business activity, taking a mortgage loan to buy the first asset or to invest in additional assets, investing in real estate in Israel or abroad, or considering whether to take out of the bank account or to save up when planning a big trip for the whole family.
Risk management occurs both during ongoing activity and while planning ahead. According to Murphy’s law, if something can go wrong, it will do so at the worst time; thus, activity planning should prepare for such an event.
Business / financial risk management is, in fact, the family unit’s ability to maximize its financial wealth while minimizing the risks; the latter secures its survival for a long time. The possible risks grow in number, and their effect on personal and familial capital grows more complex. Thus, continuous risk management that combines planning and continuous execution, will necessarily reduce the risk.
Insurance risk management seeks to protect the insured against risks that they will not be able to deal with. However, this protection has a price – the premium paid for the insurance. This portfolio is built over time, and adjustments need to constantly be made to the insurance products. Usually, the insurance portfolio is made up of many insurances, which can create components that are unnecessarily insured several times.
The insurance risk assessment examines whether there is under-insurance. For example, after the birth of the first child, the family purchases insurance for the case of death at a certain sum, but in many cases, adjustments are not made after the birth of additional children. Another example is capital expansion: as the family unit expands its capital, it must make adjustments to insurance, and even cancel some of the insurances.
The financial world also poses another risk: these products have insurances that sometimes overlap with private insurances that we purchase by ourselves. Personal and regulatory changes throughout our lifetime require us to make adjustments to financial products, prevent double insurance, minimize tax liabilities via tax avoidance, and reduce management fees, service charges, and premiums.
Risk management also considers changing the management channels of the pension funds as well as the mortgage in order to increase revenue and reduce the risk.
In order to take care of these issues, an examination should be conducted at least once every two-three years.
