Homework 4 - Key.pdf - Homework 4 RMI 2101 Spring 2018 Make...

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Homework 4 RMI 2101 Spring 2018 Make sure you read the syllabus about formatting!!! 1: Ellis Company owns a small office building worth $300,000. Cameron is the risk manager. Ellis faces the risk of fire which would completely destroy their building. The probability of a fire is known to be 3%. Cameron is considering the following risk management options to address the risk of fire to their building: a. Retention b. Full Insurance for a premium of $10,000 c. Safety Program & Retention d. Safety Program & Full Insurance (premium falls to $8,000) The cost of the Safety Program is $1,500. It has the impact of lowering the probability of a fire from 3% to 2%. However, if a fire does occur, it is still a full loss. Construct a loss matrix No Fire Fire Retention 0 300000 F.I. 10000 10000 Safety 1500 301500 Safety and F.I. 9500 9500 What is the actuarially fair premium (APF) in this case? AFP = 300000( . 03)+0( . 97) = $9000 What is the AFP when safety is introduced? 300000( . 02) + 0( . 98) = $6000 Assume Cameron’s worry value for retention ( WV R ) is $3,500 and his worry value for retention and safety ( WV RS ) is $2,000.
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