Scale of Loss of a Risk Incident & Financing

It is very important for a risk manager to know the scale of a risk. Scale of the risk includes frequency of the risk as well as severity of a risk. Any event can cause multiple losses, so the risk manager should be aware of the important exposures. For example if the key employees of the organization are traveling together and are moving from one city to another to attend a meeting and the plane crashes, the severity of this loss will be very much high.

Some types of risk incidents such as few diseases e.g. lung diseases; strain injury etc can be caused among all the employees, it could be due to the working environment, it is such that it is causing and spreading diseases throughout the work force. Assets too which are closely located with each other, can be effected by any one incident for example the stock placed in a store house can be damaged by any unforeseen event, the severity of such an event will be great.

Scale of loss is different for different organizations; it depends on the strength of the organization. If the financial strength of a company is good, then that company can bear losses to some extent. Suppose an organization having a profit of $200 billions can easily bear a loss of $5 million where as an organization having profits of $50 million can’t easily absorb such a loss, the scale of loss for such a company will be high and the scale of loss for a company having high profits will be less.

Underestimating the risk and funding the risk, is a risk in itself. Therefore the risk manager should very careful in identifying the severity and frequency of the risk. Past experience should also be kept in mind, although the past incidents are not always the extrapolation of the future, but it gives certain ideas about the frequency and severity of risk. By keeping in mind the past statistics, strategies for the future can be created.