Page 208 - RISK Management IC 86

Risk Management

indirect cost may be incurred in (a) having to
increase wages to overcome opposition from
employees and (b) higher fraud risk.

Q5. (a) Mention the areas of risk management
where probability concepts can be applied.

(b) Why and how subjective probability is used
by a risk manager ?

Ans. Risk Management should use probability concepts in
identifying and analysing loss exposures and in choosing
alternative ways of handling these exposures. In
particular, probability concepts are used to estimate:
(i) the average number of losses or average aggregate
amounts of losses from a specified peril in a given
period.
(ii) the variability around these averages of the number
of losses or aggregate amount of losses per period.

In addition to helping in estimating average losses and
the chances of losses of varying degrees of severity,
these probability concepts are also of great value in other
phases of risk management process, such as analysing
accident frequency and severity rates, determining
reasonableness of insurance premiums or the adequacy

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