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Principles of Risk Management and Insurance, 13th Edition by Michael McNamara, George E. Rejda

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Financial Analysis in Risk Management Decision Making

Risk managers must make a number of important decisions, including whether to retain or transfer loss exposures, which insurance coverage bid is best, and whether to invest in risk-control projects. The risk manager’s decisions are based on economics—­weighing the costs and benefits of a course of action to see whether it is in the economic interests of the company and its stockholders. Financial analysis can be applied to assist in risk management decision making. To make decisions involving cash flows in different time periods, the risk manager must employ time value of money analysis.

The Time Value of Money

Because risk management decisions will likely involve cash flows in different time ...

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