2 Kramerica Company has a small plant worth $8,000. The plant is subject to physical damages...

 

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2 Kramerica Company has a small plant worth $8,000. The plant is subject to physical damages and total destruction as a result of fire. From over 20,000 industry observations, the firm has derived the following probability distribution of fire losses for its physical plant. a. Kramerica is considering the following risk management options: [1] Retention [2] [3] [4] b. C. d. e. Loss Amount ($) 0 3,000 5,000 8,000 Partial insurance Deductible insurance Full insurance Probability of Loss 0.85 0.09 ? 0.02 Face Amount = $6,000; Premium - $640 Face Amount $8,000; Premium - $455; Deductible per occurrence = $1,500 Face Amount = $8,000; Premium = $700 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 matrix. [2 points] Construct the payout matrix from an insurer's perspective. [2 points] What is the AFP for partial insurance in this case? [2 points] Assume that the company's decision rule is to pick the option that minimizes TOTAL EXPECTED COST. What risk management option is chosen? Make sure that you show all calculations and clearly define TOTAL EXPECTED COST in each case. [2 points] Assume that the company's decision rule is to pick the option that minimizes TOTAL EXPECTED COST, what worry value(s) would make full insurance preferred to partial insurance? Show all work and calculations and explain your numerical answer. [2 points] What worry value(s) would make deductible insurance preferred to partial insurance? Show all work and calculations and explain your answer. [2 points] 2 Kramerica Company has a small plant worth $8,000. The plant is subject to physical damages and total destruction as a result of fire. From over 20,000 industry observations, the firm has derived the following probability distribution of fire losses for its physical plant. a. Kramerica is considering the following risk management options: [1] Retention [2] [3] [4] b. C. d. e. Loss Amount ($) 0 3,000 5,000 8,000 Partial insurance Deductible insurance Full insurance Probability of Loss 0.85 0.09 ? 0.02 Face Amount = $6,000; Premium - $640 Face Amount $8,000; Premium - $455; Deductible per occurrence = $1,500 Face Amount = $8,000; Premium = $700 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 matrix. [2 points] Construct the payout matrix from an insurer's perspective. [2 points] What is the AFP for partial insurance in this case? [2 points] Assume that the company's decision rule is to pick the option that minimizes TOTAL EXPECTED COST. What risk management option is chosen? Make sure that you show all calculations and clearly define TOTAL EXPECTED COST in each case. [2 points] Assume that the company's decision rule is to pick the option that minimizes TOTAL EXPECTED COST, what worry value(s) would make full insurance preferred to partial insurance? Show all work and calculations and explain your numerical answer. [2 points] What worry value(s) would make deductible insurance preferred to partial insurance? Show all work and calculations and explain your answer. [2 points]

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Here are the stepbystep calculations for each question a Kramericas loss matrix Write out the possib... View the full answer