RISK CONTROL AND OPTIMUM SECURITY LEVELS

The emphasis of risk control in current risk management literature has been on selecting the best insurance or noninsurance devices to meet a given risk. In the real world, the risk manager is usually confronted with the allocation of a given risk control budget among many risk exposures and for each risk among applicable devices simultaneously. This paper attempts to provide a framework for making such decisions with the objective of maximizing the firm's (or family's) financial security; that is, minimizing potential losses from all risk exposures relative to cost. The approach is based on a security function similar to the production function and the maximization rules in microeconomic theory. Therefore, the main purpose of this article is to adept well-known statistical and economic concepts to the mainstream of risk management.