HW_3_RISK

HW_3_RISK - 1. Airplane replacement cost = 700,000 3...

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Unformatted text preview: 1. Airplane replacement cost = 700,000 3 Possible Risk Management options 1. Full insurance premium of 27,000 2. Retention 3. Retention + Loss control + Full Insurance Cost of loss control is 4000, the impact of loss control is reduction of probability from 5% to 4%. When Loss control is introduced insurer agrees to reduce premium to 21,000. a. Marginal tax rate = .25 States of the World Accident No Accident 1. Full Insurance 27,000 27,000 27000 * .75 = 20250 20250 2. Retention 700,000 525000 3. Full Insurance 25,000 = 21,000+4000 4000+21000=25000 +LC 18750 18750 4. Retention 700,000+4000=704000 4000 +LC 528000 3000 b. Decision rule = minimize expected losses Prob (accident) = 5% without LC Prob (no accident) = 95% without LC Prob (accident) = 4% with LC Prob (no accident) = 96% with LC After Tax expected loss for each option 1) Full insurance 20250 with prob =.5 2) Retention 525000 * .05 + 0 * .95 = 26250 3) Full insurance + LC = 18750(.04) + 18750(.96)= 18750 4) Retention + LC = 528000(.04) + 3000(.96) = 24,0004) Retention + LC = 528000(....
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HW_3_RISK - 1. Airplane replacement cost = 700,000 3...

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