# Questions On Homework Assignment

Submitted By Gymgirl2282C
Words: 482
Pages: 2

Ryan P. Smith
915124536
Homework Assignment 5
30 March 2015

1.)
Part A Small Warehouse worth \$250,000 and tax rate of 15%

Risk Management Options

Fire
2%

No Fire
98%
Full Insurance

\$6,000
(6,000) x (1- .15) = \$5,100
\$6,000
(6,000) x (1- .15) = \$5,100
Retention

\$250,000
(250,000) x (1- .15) = \$212,500
\$0
(0) x (1-.15) = \$0
Full Insurance + Loss Control
(Loss Control cost \$1,000)
\$5,000
(5,000) x (1- .15) = \$4,250
\$5,000
(5,000) x (1- .15) = \$4,250
Retention + Loss Control
(Loss Control cost \$1,000)
\$251,000
(251,000)x(1-.15) = \$213,350
\$1,000
(1,000) x (1- .15) = \$850
Part B
Expected Losses:

Full Insurance = (\$5,100) x (.02) + (\$5,100) x (.98) = \$5,100

Retention = (\$212,500) x (.02) + (\$0) x (.98) = \$4,250

Full Insurance + Loss Control = (\$4,250) x (.01) + (\$4,250) x (.99) = \$4,250

Retention + Loss Control = (\$213,350) x (.01) + (\$850) x (.99) = \$2,975

The risk manager would choose the option of Retention and Loss Control because they desire the option with the lowest expected cost (P*).

Part C
Retention WV = \$4,000
Retention with Loss Control WV = \$3,000
TOTAL COST = P* + WORRY VALUE

Option 1 (Full Insurance): \$5,100 + \$0 = \$5,100
Option 2 (Retention): \$4,250 + \$4,000 = \$8,250
Option 3 (Full Insurance + Loss Control): \$4,250 + \$0 = \$4,250
Option 4 (Retention + Loss Control): \$2,975 + \$3,000 = \$5,975

The risk manager would choose the option of Full Insurance and Loss Control because it has the lowest total cost when compared to the other options. Total cost is P* plus the worry value, so full insurance is the best strategy to minimize the total cost.

2.) Part A Physical Plant is worth \$1,000,000
Possible Loss in \$
\$0
\$10,000
\$70,000
\$100,000
\$1,000,000
Probability of Loss
0.75
0.10
0.08
0.06
0.01
Retention

\$0
\$10,000
\$70,000
\$100,000
\$1,000,000
Partial Insurance
(Face Amount \$70,000)
\$5,000
\$5,000
\$5,000
\$35,000
\$935,000
Deductible Insurance
(Face Amount \$100,000)
(Deductible \$2,000)