Disasters
Risk Management Example
Chapter 5: Estimating Damage from Catastrophes
In Book 4: Risk Management for Businesses with Stochastic Six Sigma DMAIC Method
ISBN: 978-620-2-67095-1
Author: Vojo Bubevski (Independent Researcher)
Abstract
This chapter illustrates an example of Insurance Risk Management. A stochastic model is applied to estimate the property damages and human costs from potential disasters over a 5-year period. It is assumed that each disaster either occurs or doesn’t occur in a given year with given probabilities. Then, possible property damages and possible human costs are simulated. The model assumes that if a disaster occurs, the total damage or cost is composed of the random number of people affected, and the damage or cost per person affected.
Keywords: Business Risk Management, Risk Assessment, Insurance, Stochastic Model, Six Sigma DMAIC, Monte Carlo Simulation
The Result
The calculated results of Total Property Damage are presented in Table 10 below. The calculated Spring Flood Total Property Damage per Year is $1.0119 MM for all Years and the Total Property Damage is $5.0599 MM.
Table 10: Calculated Total Property Damage ($MM)
| Disaster | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total |
| Spring Flood | 1.0119 | 1.0119 | 1.0119 | 1.0119 | 1.0120 | 5.0599 |
| Winter Storms | 2.1495 | 2.1495 | 2.1495 | 2.1495 | 2.1495 | 10.7476 |
| Tornados | 0 | 0 | 0 | 0 | 0 | 0 |
| Rail Accident | 0 | 0 | 0 | 0 | 0 | 0 |
| Highway Accident | 0.0031 | 0.0031 | 0.0031 | 0.0031 | 0.0031 | 0.0153 |
| Chlorine Spill | 0 | 0 | 0 | 0 | 0 | 0 |
| Total | 3.1646 | 3.1646 | 3.1646 | 3.1646 | 3.1646 | 15.8228 |
The calculated Winter Storm Total Property Damage per Year is $2.1495 MM for all Years and the Total Property Damage is $10.7476 MM.
The calculated Highway Accident Total Property Damage per Year is $3,100 for all Years and the Total Property Damage is $15.300.
The other three disasters’ Total Property Damage per Year is calculated to be zero for all five years including the Total.
The calculated Total Property Damage per Year is $3.1646 MM for all Years and the calculated Grand Total is $15.8228 MM.
The Total Property Damage Mean per Year results, which are calculated by probability distributions, are presented in Figure 1. The Mean per Year is $13,351,627.23 for all Years, which is one-fifth of the Grand Total Mean of $ 66,758,136.17