Loss control activities to manage risk

What is loss control?

It is a risk management strategy that aims to reduce the frequency or severity of potential losses.

What is loss prevention?

Actions that reduce the probability that a loss occurs.

What is loss reduction?

Actions that reduce the impact or severity of the loss.

What is risk avoidance?

Choosing not to engage in a risky activity to eliminate the risk.

Does loss control affect risk probability, severity, or both?

It can affect one or both, depending on the method used.

What is expected loss?

The average financial damage expected from a risk over time.

What is the formula for expected loss?

\text{Expected Loss} = \text{Probability of Loss} \times \text{Loss Severity}

What is the total accident cost?

Expected loss per unit x # of units at risk

What is the goal of optimal loss control?

To reduce losses in the most cost-effective way, spending just enough to prevent accidents or damage without wasting money. MC=MB

What is included in the total cost of risk?

• Expected losses (e.g. property damage, liability, business interruption)

• Cost of loss control (e.g. safety programs, training, equipment)

• Cost of risk financing (e.g. insurance premiums, reserves)

• Cost of residual risk (e.g. reputation damage, legal penalties not covered)

What is marginal cost in risk control?

The additional cost of implementing one more unit of safety.

What is marginal benefit in risk control?

The reduction in expected losses from one more unit of safety.

What is the formula for marginal cost?

Marginal Cost = Cost at effort level (n) – Cost at effort level (n1)

What is the formula for marginal benefit?

Marginal Benefit = Expected Loss at effort level (n) – Expected Loss at effort level (n1)

What is the optimal safety level?

When marginal cost equals marginal benefit.

What is asset segregation?

Dividing assets across locations to reduce exposure to total loss.

Does segregation reduce expected loss?

No, but it reduces the chance of extreme outcomes.

What is an indirect loss?

Secondary cost that happens because of a main (direct) loss.

How does segregation affect indirect losses?

It lowers the probability of large indirect losses.

Why might firms underinvest in safety?

Because it's costly, they focus on short-term profits, underestimate risks, rely on insurance, lack good data, or face weak regulation.

Why do governments regulate safety?

• Protect public health and lives

• Prevent firms from cutting corners to save money

• Correct market failures, like underinvestment in safety

• Reduce societal costs from accidents, injuries, or deaths

• Ensure fair working and living conditions

What is the value of a statistical life (VSL)?

the amount of money people are willing to pay to reduce the risk of death.

What are the two ways to estimate the Value of a Statistical Life (VSL), and how do they differ?

• Willingness to pay (WTP): How much money people are willing to pay to reduce their risk of dying (e.g., paying for safer cars or cleaner air).

• Willingness to accept (WTA): How much extra money people are willing to accept (or require) to take on a higher risk of dying (e.g., higher wages for dangerous jobs).

What is the formula for VSL?

\text{VSL}=\frac{\text{Wage Difference}}{\text{Risk Difference}}

Why is VSL used in regulation?

• Evaluate the benefits of safety policies in monetary terms

• Compare costs and benefits when deciding on rules that reduce risk

• Justify investments in health, safety, and environmental protection

How do you calculate cost per life saved?

\text{Cost per Life Saved} = \frac{\text{Total Cost}}{\text{Lives Saved}}

When is a safety regulation considered efficient?

When cost per life saved is less than the VSL.