Risk is part of life : I face countless danger everyday driving to work. sure I can try minimize many of them through my own driving behavior . but I can’t prevent motorist behind me who is talking on his mobile from rear-ending me while I’m waiting at a stoplight. As much as we would have it otherwise, risk is part of life. Some risks can be averted by steering clear of them. Many are, however, unavoidable. False sense of security Sometimes you can insure yourself against the consequences of risks. While this doesn’t mean the risks will automatically vanish, it does mean other parties will bear all or part of the consequences. It is the insurance companies’ responsibility to control those consequences. This means, providing I pay my premiums on time, they will fully pay the costs for accidents like the one above. Even if the telephoning culprit does not earn a penny. The danger with insurance is that it can create a false sense that risks no longer exist. I came across a fantastic example of this recently at a Dutch political party’s brainstorming evening. The topic was the future of the banking industry and I and several others were asked to attend as advisers. It was an interesting experience. The ‘specialist’ from the related political party turned out not to have the foggiest idea of all the things banks do. That made it tricky. Because if you’re going to talk about the future structure of the banking industry, it helps if you know something about financial brokerage, the difference between savings, payments and loans and so on. Be aware of the risks you run One of this ‘specialist’s’ unyielding standpoints was that bank customers should not run any risks whatsoever. But that is clearly hard to achieve. Because if you were to take all the risks away from customers, who would end up holding the risks? First the providers of risk-bearing capital of course, but that is already the case anyway. It really all boils down to the scenarios where there is insufficient capital and the bank winds up in difficulties itself. So the specialist says the banks should just insure all their risks through insurance companies. It’s a fascinating idea, but which insurers are prepared and able to insure the entire balance sheet of a large bank? Plus it would obviously be impossible to charge on the immense premiums those banks would have to pay to the customers. The banks are incidentally also having to raise more capital as they are being required to push up their equity ratios. Financially literate readers will instantly grasp that something isn’t right here. What’s more, if things were to go seriously wrong at some point and the insurance companies would no longer be able to bear the burden, the state would obviously have to intervene. None of the advisers at the brainstorm session, including myself, were able to explain to the young man in question that this scenario would only mean that the risks would be removed from the customer’s sight. However, if things went wrong, the same customer would unexpectedly have those risks thrown right back in his face, but this time in his role as taxpayer. Okay, it might be an extreme example, but the structure of the Netherlands’ deposit guarantee scheme means it is just one step away from our specialist’s risk-free Utopia. Sometimes people are better off being aware of the risks they are running. So that as a mature citizen you can decide: which risks do I find acceptable? This attitude can lead to a less extensive, but differently designed form of regulation, which could result in greater financial stability. Maybe it’s something worth thinking about after all?
So not taking any risk will be biggest risk , so understand the risk accept it