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axell13965
axell13965
26.03.2021 • 
Business

2. Kramerica Company has a small plant worth $10,000. The plant is subject to physical damages and total destruction as a result of fire. From over 6,000 industry observations, the firm has derived the following probability distribution of fire losses for its physical plant. Loss Amount ($) Probability of Loss 0 0.89 1,500 ? 6,000 0.065 10,000 0.005 Kramerica is considering the following risk management options: [1] Retention [2] Partial insurance Face Amount = $8,000; Premium = $580 [3] Deductible insurance Face Amount = $10,000; Premium = $470; Deductible per occurrence = $1,000 [4] Full insurance Face Amount = $10,000; Premium = $600 a. Construct the loss matrix from Kramerica’s perspective. Make sure you show loss in the top row and out-of-pocket cost in the bottom row in each cell of the loss matrixEx. [2 points] b. Construct the payout matrix from an insurer’s perspective. [2 points] c. What is the AFP for deductible insurance in this case? [2 points] d. Assume that the company’s decision rule is to pick the option that minimizes TOTAL EXPECTED COST. Can you identify what risk management option is chosen? Why or why not? Make sure that you show all calculations and clearly define TOTAL EXPCTED COST in each case. [2 points]

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