# Risk financing - DRAFT.docx - A i ii Assuming SafeBuild...

• No School
• AA 1
• 3

This preview shows page 1 - 2 out of 3 pages.

A. i & ii Assuming SafeBuild insurance company charges an actuarially fair premium for insurance, then the charge for \$1 medical coverage for clumsy workers is calculated as 90%x50= \$45 , where \$45 is the actuarially fair premium and a \$1 coverage will equal to 45/50= \$0.9. For the skilled workers the actuarially fair premium is 30%x50= \$15 , hence a \$1 coverage will equal to 15/50= \$0.3. This results provides the builders with the option to get \$50 of insurance as both builders are risk adverse and the SafeBuild is providing a fair premium price. According to Ligon and Cather (1997), insurance companies will charge a different per dollar price based on the informational value they have on the insured. A. iii & iv With the fair premium price, the clumsy workers will have \$ 100 \$ 45 = \$ 55 , left over for consumption while the skilled will have \$ 100 \$ 15 = \$ 85 . In both case, injured or not injured, the clumsy builders will have \$55 leftover for consumption, while the skilled will have \$85 left over for consumption regardless of whether they are involved in an accident or not. B. Part: A - i & ii The maximum both are willing to pay for insurance is equivalent to the amount that would leave them in the same position if they did not have insurance. The calculations for this are as follows: For the clumsy builders, 0.9x (50 0.7 ) +0.1(100 0.7 ) =16.43 For the skilled builders, 0.7x (100 0.5 ) + 0.3 (50 0.5 ) = 9.12 If both builders get full insurance coverage, they would be fully compensated if injured, meaning that either way (injured or not), they would still have their full consumption amounts and their only expense would be would be the insurance coverage costs. A study by Somerville (2004) showed that when insurance is actuarially fair, even with loaded premiums, the decision for getting insurance in relation to consumption are separable.

Subscribe to view the full document.

• Fall '19

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern