Exam CISSP Topic 4 Question 669 Discussion

Earthquake would present the higher annualized loss expectancy (ALE) according to the table in the image. ALE is a metric that measures the expected loss per year due to a specific risk or threat. ALE is calculated by multiplying the single loss expectancy (SLE), which is the estimated cost of a single occurrence of the risk or threat, by the annualized rate of occurrence (ARO), which is the estimated frequency of the risk or threat occurring in a year. According to the table, the ALE for each event is as follows:
Fire: $1,000,000 x 0.1 = $100,000
Flood: $250,000 x 0.2 = $50,000
Windstorm: $50,000 x 0.5 = $25,000
Earthquake: $800,000 x 0.02 = $16,000
Therefore, earthquake has the highest ALE of $16,000, followed by fire, flood, and windstorm.
Note that the insurance coverage does not affect the ALE calculation, as it only reduces the actual loss, not the expected loss. However, insurance coverage can be used to reduce the total cost of risk (TCOR), which is the sum of ALE and the cost of risk mitigation, such as insurance premiums, deductibles, and administrative costs.