In: Finance
The four conditions of rational risk assessment are
1) Identification of risk
2) Potential consequences or impact in case the risk materialises
3) Likelihood of the risk being manifested
4) Mitigation measures which could be put in place to reduce risks
In this case we apply this framework to risk of fire in a building
In a building which is used for residential purpose, the fire risk is a significant risk and should be analysed. If a fire occurs, then there could be widespread damage to property and lives could also be lost. While the likelihood of such an event is low, we need to inspect the gas lines as well as electrical insulations to ensure these are in order. If these are defective, then fire risks increases significantly. So likelihood is a function of building conditions and precautions in place.
Mitigation measures include having fire extinguishers in place and also conducting fire audit. Moreover use of fire retardant cables and material reduces the risk significantly