Principles of Risk Management and Insurance, 13th Edition

Loss Forecasting

As noted, a risk manager must also identify the risks the organization faces, and then analyze the potential frequency and severity of these loss exposures. Although loss history provides valuable information, there is no guarantee that future losses will follow past loss trends. Risk managers can employ a number of techniques to assist in predicting loss levels, ­including the following:

• Probability analysis

• Regression analysis

• Forecasting based on loss distributions

Probability Analysis

Chance of loss is the possibility that an adverse event will occur. The probability (P) of such an event is equal to the number of events likely to occur (X) divided by the number of exposure units (N). Thus, if a vehicle fleet has 500 vehicles ...