Stochastic Models of Risk Management Operations

Abstract

This chapter is devoted to the implementation of two purposes. The formulation and investigation of stochastic models for the fundamental risk treatment operations are the two purposes. Risk control operations and risk financing operations constitute the two categories of fundamental risk treatment operations. This chapter consists of two parts. The first part concentrates on stochastic modeling of risk reduction operations, risk duration reduction operations, and risk frequency reduction operations which are the main risk control operations. The second part concentrates on stochastic modeling of risk financing operations. The stochastic modeling of the cost for treatment of ongoing risk occurrences, and the reserve of risk financing constitute the main theoretical and practical contribution of the second part of this chapter. In theory and practice, risk treatment is implemented by combining stochastic models of risk control operations with stochastic models of risk financing operations.