Default Risk-based Probabilistic Decision Model on Natural Disasters Risk Control

C.P. Tseng, W.L. Chiang, W.-K. Hsu, D.-M. Hung, C.H. Tsai, and C.W. Chen (Taiwan)


Management and economics, risk control, disaster prevention


This paper describes how risk-based risk control allocation model works. We begin by discussing the economic rational for allocating risk control in a diversified organization like enterprises. Considering a probability model for risk control decision making under uncertainty and risk, we propose a model involving stochastic total loss amount constraints with respect to various tolerable default level. Our main objective is to develop a method that would allow shaping the risk associated with risk control outcomes. The direct and indirect losses caused by the simulated disasters can be estimated using the engineering and financial analysis model. Basing on the model, we can generate exceeding probability (EP) curve and then calculate how much loss will be ceased or transferred to other entities, if somehow spending budgets on risk control actions. Optimal natural disasters risk control arrangement with probabilistic formulation is explained in this paper. Results from the proposed formulations are compared in case studies.

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