Disasters Risk Management by Using Cost-benefit Analysis on Consideration of Variance of Losses

Abstract

Organizations that have introduced various risk management strategies often evaluate risk treatments for disasters by using cost-benefit analyses. However, cost-benefit analyses calculate benefits based on the expectation of losses inflicted by disasters and are not influenced by the fluctuation of losses. Therefore, we selected both expectation and Value at Risk as variables to develop a cost-benefit analysis in order to evaluate risk treatments. By such analyses, it is possible to determine the optimum policy condition of insurance and the optimum mitigation. In addition, we can evaluate the optimum risk treatment that combines insurance and mitigation.