Risk Management Decisions When Effectiveness is Unreliable

  • Harris Schlesinger
Part of the Huebner International Series on Risk, Insurance and Economic Security book series (HSRI, volume 16)


The three main tools of the risk manager are insurance, loss prevention (reducing loss frequency) and loss reduction (reducing loss severity). The latter two of these tools are referred to collectively as loss control. Typically, it is the goal of risk management to use these tools in an economically efficient combination to achieve desired reductions in a firm’s exposure to risk. The interactions of these tools is often apparent, such as when insurance premiums reflect a firm’s investment in loss control in order to award discounts to firms that have taken appropriate loss-control actions. Other interactions are often more obtuse, such as when insurance purchases cause a moral hazard, whereby a firm’s loss-control investment might not be maintained following the purchase of insurance. Since the effort of the firm in properly maintaining its loss-control investment is partly unobservable, we cannot be certain that a firm will not “slack off” on its loss-control activities following the purchase of insurance.


Cash Flow Risk Aversion Marginal Utility Risk Averse Insurance Premium 
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© Kluwer Academic Publishers 1993

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  • Harris Schlesinger

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