Question

5. Leon is the risk manager for ABC, Inc. He has evaluated the following risks in terms of frequency and severity and asks your opinion as to which risk management tool(s) to use: Probability/Frequency Severity per Occurrence A Fire destroys factory 0.0001 $10,000,000 B. Loss of property through employee-theft 0.1 $1,000 c. On-the-job employee disability 0.01 $1,500,000 D. Loss due to misplaced inventory (computer) $2,000 0.02 $400 E. Loss due to failure to reduce energy bill (lights off, air conditioner off on weekends) 0.01 $2,000 F. Air conditioning unit failure (compressor) 0.1

Answer 1

In such kind of scenario, a Probabilistic Risk Assessment (PRA) tools should be used.

PRA tools asses and evaluate the risks of various factors/ events based on their probability and severity of occurence. Using the PRA tool risk can be quantified as a possible/ expected loss using the following two features:

A. Probability of occurence of each factor/ event

B. Potential Loss / Severity if the factor/ event occurs

The same has been given in the question.

Now to estimate the absolute amount of risk (expected loss) arising from these factors, we need to multiply the A & B given above for each of the factors/ events and add them up. The calculation is shown below:

Factor/Event	Probability	Severity	Probability x Severity	Formula
Fire Destroys Factory	0.0001	10,000,000	1,000	= 0.0001 x 10000000
Loss of Property through employee theft	0.1	1,000	100	= 0.1 x 1000
On the job employee disability	0.01	1,500,000	15,000	= 0.01 x 1500000
Loss due to misplaced inventory	0.1	2,000	200	= 0.1 x 2000
Loss due to failure to reduce electricity bill	0.02	400	8	= 0.02 x 400
Air Conditioning Unit filure	0.01	2,000	20	= 0.01 x 2000
Total Risk (Estimated Loss)			16,328

Hence the total risk estimated (expected loss) using the PRA tools is $16,328