The risk analyst can assume in the above case that

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The risk analyst can assume in the above case that for all possible future periods, the mean loss will lie within a known range of $40. Specifically, the risk analyst can be 95.45 percent confident that the mean loss will fall in the range $40 ± 6.30 (two standard errors). At the 99.73 percent confidence level, the mean loss will fall within the range $40 ± $9,45 (three standard errors). Note that in this calculation the risk analyst may draw inferences only about the mean loss for a large number of years. The mean loss for the next year of any single year may have a greater variation than that shown above. Thus, in the above example the distribution of losses from 1,000 workers in a single year could look very differently from the above.
Setting Loss Reserves. Using the above analysis and knowing that the firm has 1,000 workers, the risk analyst may predict that the average annual losses will not exceed $49.45 x 1,000, or $49,450, 99.73 percent of the time. Using this information, the risk manager can estimate the size of a loss reserve fund in the event he plans to recommend self-insurance for the risk. In this case, he might recommend a self-insurance fund of $50,000, ; even though the best estimate of losses for any one year is $40,000. Rate Negotiation. The risk manager may also use the above analysis in his negotiations with commercial insurers on premium rates, The pure premium, or expected value of the loss, is $40; the relative risk (at the 99.73 percent confidence level) is $9.45/540, or 24 percent. If the insurer requires an expense loading of 35 percent, the gross premium should approximate $40/(1 - .35), or $61.54. plus whatever charge for risk the insurer might make. Because the risk manager can demonstrate that there is little chance that in the long run the pure premium will exceed the expected by mote than $9,45 per worker, the final premium quoted per worker should not exceed $40.00 $9.45 $76.08 1 .35 or Some insurers may quote less than this amount because their aversion toward risk may be less than other insurers. (Measurement of subjective risk attitudes is discussed below.) TOPIC TEN RISK MANAGEMENT TECHNIQUES
INTRODUCTION: In our previous discussion we looked at risk measurement. Once risks have been identified and measured in terms of their probability of occurrence and the magnitude of the magnitude of the losses that each one of them could cause. These two factors provide a basis for classifying and prioritizing the risks. Once this has been done, the next step is to determine how each of the risks identified will be dealt with. This topic provides a guide on some of the methods or techniques that could be used in handling the risks. RISK RETENTION A firm exposed risk usually has two alternatives to deal with the risk. One alternative is to transfer the risk or its consequences to commercial insurers and other third parties. The other alternative is to deal with the risk internally. When a firm decides to deal with a risk internally, it is called risk retention. There are two forms of risk retention.

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