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Managing the Economic Risks of Fire.

pdf icon Managing the Economic Risks of Fire. (7230 K)
Lippiatt, B. C.

; 10 p. March 1992.


risks; economic factors; costs; fire safety; fire risk; risk management; fire models; fire insurance; decision analysis; fire losses; damage; fire protection


The cost of purchasing, installing, and maintaining fire safety systems constitutes a significant and increasing share of the owning and operating cost of buildings. The National Fire Protection Association (NFPA) estimates fire safety investment costs to range between three and nine percent of new construction costs, depending on construction type. Selecting the "best" fire protection investment package is a complex problem that involves difficult tradeoffs between reducing and transferring exposure to fire loss risks (risk exposure). Risk exposure may be reduced, and even avoided, by investing in fire protective devices, building design, equipment, and furnishings, and improvements in fire safety education and operating procedures. Risk exposure may be transferred by purchasing fire insurance. By optimizing the tradeoffs among reducing and transferring risk exposure, substantial cost savings could be realized while maintaining or even raising current safety levels. Fire risk management means controlling risk exposure. Typically, risk exposure may be neither fully avoided nor fully transferred. They may not be fully avoided because the costs and aesthetics of making a building completely fire safe are prohibitive. They may not be fully transferred because insurance does not cover all losses from a catastrophic fire. For many businesses, the indirect, or business losses from fire are the most troublesome and enduring. A major fire can cause business interruption and market share losses which may result in crippling a company's growth or even threatening its survival. Indeed. fully 40 percent of insured small businesses that suffer a major fire never reopen.