HomeworkAssignment6-AnswerKey-Fall2007

HomeworkAssignment6-AnswerKey-Fall2007 - RMI 2101...

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RMI 2101 I NTRODUCTION   TO  R ISK  M ANAGEMENT H OMEWORK   ASSIGNMENT  6 A NSWER  K EY F ALL  2007 1. Using the after tax equation ~ expected loss*(1 – Tax Rate) ~ we get the following After Tax Loss Matrix: a. b. First we calculate the after tax expected loss for each alternative: Full Insurance: 14,300*(.03) + 14,300*(.97) = $14,300 Retention: 455,000*(.03) + 0*(.97) = $13,650 (Note in the alternatives with Loss Control the prob. of loss falls to 2%) Full Insurance w/ LC: 13,000*(.02) + 13,000*(.98) = $13,000 Retention w/ LC: 456,950*(.02) + 1,950*(.98) = $11,050 The risk manager’s decision rule is to minimize expected loss and in this case that alternative would be Retention w/ LC. Loss(700,000) No Loss Probability 3% 97% Full Insurance 22,000 After Tax = 22,000(1-.35) = 14,300 22,000 After Tax = 22,000(1-.35) = 14,300 Retention 700,000 After Tax = 700,000(1-.35) = 455,000 0 After Tax = 0(1-.35) = 0 New Probability With Loss Control 2% 98% Full Insurance with LC 17,000 + 3,000 = 20,000
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This note was uploaded on 04/07/2008 for the course RISK MANAG 2101 taught by Professor Drennan during the Fall '07 term at Temple.

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HomeworkAssignment6-AnswerKey-Fall2007 - RMI 2101...

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