Page 37 - EBOOK RISK MANAGEMENT

4.0 RISK MEASUREMENT AND ANALYSIS

4.1 Risk Measurement and Analysis

Risk measurement is fundamental to the insurance industry. It can be defined as a

process of evaluating the likelihood or probability of occurrence and severity or

consequences of risks. All risks need to be rank from higher risk to lower risk event.
Risk measurement and analysis can help businesses to decide on the best decision

to be taken in mitigating the risk.

There are two important features in measuring risk, which is the possible severity of

loss (how serious the loss is) and the possible frequency or probability of loss (how
often a loss will occur). Good knowledge in frequency and severity of loss is

important to ensure that the person who responsible for managing risks are making

the right decisions and how risks to be funded. It is important to measure on how
likely the risk will be and it the risk occur, how costly it will be.

4.2 Risk Matrix

Risk measurement and analysis may vary in detail according to the risk. Analysis of

risk normally using a mix of qualitative and quantitative methods. Risks with high
frequency and high severity are identified as “high”, and will be selected for higher

mitigation actions to lower the likelihood and impact of the risk occurring.

A qualitative methods in risk analysis are rely on risk matrix which helps the decision

maker in visualize the probability and severity of a potential risk. The risk matrix is

based on two intersecting factors: the likelihood that the risk event will occur, and
the potential impact that the risk event will have on the business. Depending on

likelihood and severity, risks can be categorized as high, moderate, or low. As part

of the risk management process, companies use risk matrix to help them prioritize

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