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Risk Management
Q4. (a) Corporate Risk Attitudes are to some extent,
the reflection of Corporate objects. Discuss.
Ans. True, Corporate risk attitudes are partially a reflection
of corporate objectives. A firm may achieve a given
amount of maximum profit if there are no losses
attributable to uncertain events/pure risks. Best choice
for a firm is loss prevention, which though reduce the
maximum possible profit, but reduces the probability
and severity of loss.
The firm may then decide to purchase insurance which
involves the cost of premium, inclusive of the insurer's
administrative expenses and profit as well. This premium
too reduces the maximum possible profit. So, one has
to balance the expenses with the risk. This leads to two
conclusions. A firm seeking to maximize short term
profit regardless of risk, would not spend on either loss
prevention or insurance.
On the other hand if the firm's objective is to maximize
expected profits, then any expenditure on loss
prevention is worth undertaking even if the actual profit
becomes lower than the expected profit. So, if the firm
is prepared to forgo some profit in order to achieve
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