Risk Measurement

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Risk Measurement
Once the risks have been identified, the risk manager must evaluate them. The
process of creating data is known as measurement. This means measuring the
potential size of the loss and the probability that
it is likely to occur.
Information is needed concerning two dimensions of each risk exposure:
 (1) the frequency of occurrence and
(2) the severity of the losses that will occur.
Information is collected for the purpose of description of a phenomena,
evaluation and prediction. It is usually desirable to !o1lJl1Dla1"ize the data by
preparing frequency distributions. The presentation of data can bring a very
useful information on the causes or consequences of a phenomena. Table 4.1
gives an example of the causes of accidental deaths in India.
One difficulty that is encountered in the measurement process is that an
event may give rise to both direct and indirect costs. Direct losses involve the
direct costs associated with (1) property exposures, i.e. replacing or repairing
damaged or destroyed property, (2) liability exposures and (3) personnel
exposures, expenses resulting from death, injury or sickness. Indirect losses are
those that arise as a consequence of direct losses.
Risk Assessment
Loss-frequency and loss-severity data do more than identify the important losses.
They are also extremely useful in determining the way to handle the situation.
Risk assessment aims to determine how serious a hazard is and whether
individuals or the society should be exposed to it. One aspect to the idea of risk
measurement relates to the basic premise that the ability to predict the outcome
of a risk is critically dependent upon the quantity and reliability of information
relating to the phenomenon that is being investigated. In some cases, however,
the uniqueness of the situation is such that it is difficult to measure and hence to
assess the risk.
In all risky situations, there are three important determinants which are
information, control and time. Crisis management often refers to the lack
of time to assess the risk and take a decision. Lack of control and/or lack of
information about the risk in a crisis management situation are also usually the
rule.
Despite an appearance of objectivity, risk assessment is inherently
subjective. The motion picture "Jaws", has increased the availability (and
perceived likelihood) of sharks attacks. Some nuclear power proponents feel that
the risk of that technology are exaggerated in the public' eye because of
excessive medium coverage. Fischhoff et al.(1981) consider that the
acceptability of a risk is a relative concept rather than an absolute one and
therefore, there can be no single, all-purpose number that expresses the
acceptable risk for a group or a society.

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