OBJECTIVE AND RISK MANAGEMENT参考.pptVIP

T2.* HN, Ch. 2 McGraw-Hill/Irwin Copyright ? 2004 by the McGraw-Hill Companies, Inc. All rights reserved. OBJECTIVE AND RISK MANAGEMENT Chapter 2 Need for a RM Objective Risk imposes costs on businesses and individuals Risk Management (e.g., loss control and insurance) also is costly ?Tradeoffs must be made Need a criteria for making choices about how much risk management should be undertaken Appropriate Criteria: Minimize Cost of Risk Components of the Cost of Risk Tradeoffs in the Cost of Risk Decreasing one component of the cost of risk usually is associated with an increase in another component Examples: Decreasing expected direct losses (worker injury costs) by increasing loss control costs (increased workplace safety) Decreasing expected indirect losses (bankruptcy costs) by increasing loss financing costs (insurance costs) Decreasing cost of residual uncertainty by increasing loss financing costs (insurance costs) Cost of Risk Example Firm value in ideal world of no risk = $100,000. Issues to be examined: What is firm value with risk of worker injuries? What is relation between firm value and cost of risk? Cost of Risk Example Business is faced with one source of risk: Probability of worker injury = 1/10 Losses from a worker injury: medical expenses $10,000 lost pay $50,000 total $60,000 Expected loss = $_________ Cost of Risk Example Option 1: Do Nothing Cost of risk: Expected loss = $________ Cost of residual uncertainty = $4,000 (assumed) Cost of loss control = $0 Cost of loss financing = $0 Cost of internal risk reduction = $0 Total cost of risk = $__________ Firm value = $100,000 - $________ = $_________ Cost of Risk Example Option 2: Loss control Spend $2,000 to reduce probability of loss to 1/20 Cost of risk: Expected loss = $_________ Cost of residual uncertainty = $3,000 (assumed) Cost of loss control = $2,000 Cost of loss financing = $0 Cost of internal risk reduction = $0 Total cost of risk = $_____