Risk Management: Considering Statistics

The trouble ain’t that there is too many fools, but that the lightning ain’t distributed right.

This quote by Mark Twain is a wonderful starting point in a discussion about managing risk in a personal financial plan. One of the areas which needs to be addressed is the statistical odds of an event occurring. Fools (which I make it a point to never call anyone) and lightning provide a wonderful opportunity to discuss some math concepts and risk management.

Everyone has heard the statistical odds of being struck by lightning are approximately one in a million. This statistic is based on the average of reported lightning strikes in the U.S. The math works this way: 310,000,000 (U.S. Population) / 280 (Average annual lightning deaths and injuries) = 1 in 1,107,143. Which is approximately, give or take, one in a million (U.S. National Weather Service).

Now here is where an individual can play and have some fun with statistics. The state within which you live has a tremendous impact on one’s odds of being struck by lightning, which many mean that ‘fools’ are smarter than for which Mr. Twain gives them credit. Those who live in Montana (the Big Sky State!) have a greater statistical chance of being struck by lightning – roughly 1 in 249,550. On the other end of the continuum is California. Residents of that state have the lowest statistical odds of being struck by lightning. So the lesson for each of us is that risk can be managed. Fools do not live in Montana in order to increase their chances of ‘not’ being struck by lightning.Automobile insurance is another great example of fun with statistics. The average driver of an automobile has a collision once every 18 years, give or take. This means that over the course of a lifetime the average driver will have between three and four accidents.  And drivers, like fools and Montana, may reduce the statistical risk of a collision by modifying their behavior:  don’t drive between midnight and 3 a.m. on Saturdays and Sundays; don’t speed; and don’t text or use a cell phone while driving.

The decision as to how much risk to transfer to an insurance company (think premium dollars) is based on statistics. Yes, there are broad averages, but this is only the starting point in the process. Are you able to skew the statistic in your favor by modifying behavior? It worked for Fools, just ask Mr. Twain.

I hope you will join me for this month’s Webcast: Risk Management and the Personal Financial Planning Process. We will review the various strategies for risk management / insurance in the planning process: property and casualty; disability; health; life; long term care; annuities and how they affect planning for your clients.

Join us on Friday, March 28, 2014 at 1:30PM EST. For more information or to register, please send an email to hello@ttillery.com. Virtual Seating is limited. One hour of CE/CPE is available.



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