Question

Kim is the risk manager for a large organization. She is evaluating whether the organization should purchase a fire suppression system. She consulted a variety of subject matter experts and determined that there is a 1 percent chance that a fire will occur in a given year. If a fire occurred, it would likely cause $2 million in damage to the facility, which has a $10 million value. Given this scenario, what is the exposure factor?

Answer 1

Answer:

Exposure factor=20%

Explanation:

Exposure factor is percentage value of an asset that can potentially by lost if a particular risk is realized. Most risk managers use the exposure factor to determine if the purchase of certain property usually equipment or machinery is worth it. It can be thought of as comparing the value one would lose if a certain risk is attained to the original value of the property. For example in case the risk is realized and the value of the property is completely lost, the exposure factor would be 1.

It is calculated by taking the value of the property lost over the original value then converted to a percentage. This can be expressed as shown;

E.F=(Vl/Vo)×100

where;

E.F=exposure factor

Vl=value lost in case of the scenario

Vo=original value

In our case;

E.F=unknown

Vl=$2 million

Vo=$10 million

This can also be written as;

Exposure factor=(value lost/original value)×100

Replacing;

E.F=(2/10)×100=20%

The exposure factor=20%