Question

Kramerica Company has a small plant worth $60,000. The plant is subject to physical damages and total destruction as a result of re. From over 10,000 industry observations, the rm has derived the following probability distribution of re losses for its physical plant.
1
Loss Amount ($) Probability of Loss
0 .5
20,000 .2
30,000 .2
60,000 ?

Kramerica is considering the following risk management options:

Retention
Partial Insurance - Coverage Limit = $30,000; Premium = $10,000
Deductible insurance - Deductible per occurrence = $20,000; Premium = $15,000
Full insurance - Premium = $24,000

Answer the following questions:

(a) Construct the loss matrix. (2 pts)

(b) Assume that the rm decides to choose a risk management alternative without including valuation for subjective risk. What risk management option is chosen? Show all work and calculations for each option. (3 pts)

(c) What worry value(s) would make full insurance preferred to partial insurance? Show all work and calculations and explain your numerical answer. (1 pt)

(d) What worry value(s) would make deductible insurance preferred to partial insurance? Show all work and calculations and explain your numerical answer. (1 pt)

(e) What is the AFP for each insurance option? (3 pts)

Answer 1

Ans

Step-by-step explanation