Page 121 - RISK Management IC86 Ebook

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Q1. Effective risk management, depends to a large
extent, on the use of probability concepts. Discuss
this concept.

Ans. Effective risk management truly depends to a large extent
on the use of probability concepts. Particularly, probability
concepts are used to estimate:
(i) the average number of losses or average aggregate
amount of losses from specified peril in a given period.
(ii) the variability around these averages of the number
of losses or aggregate amount of losses per period.
(iii) from points(i) & (ii) the likelihood that the number of
losses or the aggregate amount of losses in a given
period will exceed a specified number or amount.

In addition to helping in estimating average losses and
chances of losses of varying degrees of severity, the
probability concepts are of great value in other phases of
the risk management process, such as analysing accident
frequency and severity rates, determining the
reasonableness of insurance premiums or the adequacy
of reserves established for risk retention, and selecting
alternative risk management techniques on the basis of
the probable impact on an organisation's profits and
efficiency.

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